Академический Документы
Профессиональный Документы
Культура Документы
International
Business
ADAM STARCHILD
TAX HAVENS FOR INTERNATIONAL BUSINESS
Also lJy Adam Starchild
THE AMAZING BANANA COOKBOOK
BUILDING WEALTH: A Layman's Guide to Trust Planning
BUSINESS IN 1990: A Look to the Future
CAPITAL PRESERVATION THROUGH INTERNATIONAL
DIVERSIFlCATION
ESTABLISHING SELF-EMPLOYED AND INDMDUAL
RETIREMENT PlANS
EVERYMAN'S GUIDE TO TAX HAVENS
HOW TO DEVELOP AND MANAGE A SUCCESSFUL
CONDOMINIUM
HOW TO DEVELOP YOUR OWN CONSTRUCTION AND
LAND DEVELOPMENT BUSINESS
INVESTING IN THE USA
IT'S YOUR MONEY: A Consumer's Guidc to Credit
MARKETING COMPUTER HARDWARE AND SOFTWARE IN
LATIN AMERICA
PAYMENT SYSTEMS STUDIES
THE SEAFOOD HERITAGE COOKBOOK
SECOND PASSPORTS AND DUAL NATIONALITY
STARCHILD & HOLAHAN'S SEAFOOD COOKBOOK
(co-author)
SWISS MONEY STRATEGIES
THE TAX HAVEN REPORT
THE TAX HAVEN STORY
TAX HAVENS: What They are and What They Can Do for the
Shrewd Investor
TAX HAVENS AND CORPORATIONS
TAX PLANNING FOR FOREIGN INVESTORS IN THE US
(co-author)
USING OFFSHORE HAVENS FOR PRIVACY
Tax Havens for
International Business
Adam Starchild
~CMILLAN
Business
© Adam Starebild 1994
11 10 9 8 7 6 5 4 3
04 03 02 01 00 99 98 97 96
Contents
Preface vii
1 Tax Havens - An Introducdon 1
Understanding tax bases 7
Corporate taxes 8
Planning the tax haven entity 8
2 Establisbing the Foreign Company 11
Planning the foreign corporation 12
Time and cost data for organising the corporation 16
3 Who Can and Cannot Benefit from Tax Havens 18
The offshore tax haven 18
Typical tax haven operations 23
Establishing of headquarters 24
4 Tax Haven Classificadons 26
Tax havens with no income lax 26
Tax havens with no foreign source income tax 27
Speciallegislation for regional offices of
multinational companies 29
Tax havens for special purposes 29
5 Tax Havens with no Income Tax 31
6 Tax Havens with no Tax on Foreign Source Income 44
7 Tax Havens for Special Purposes 74
8 Special Legisladon for Regional Offices of
Multinadonal Companies 117
9 Switzerland - not al1 that it is Alleged to be 127
10 Liechtenstein - A Special Case 139
Index 147
v
Preface
ADAM STARCHILD
vii
1 Tax Havens -
An Introduction
1
2 Tax Hauensfor International Business
under the laws of - and located in - a tax haven country. In
such a structure, the horne country's revenue service views the
tax haven entity as a foreign citizen, exempt from taxes on
certain kinds of incomc. Once this status is established, the
only taxes to consider are those levied by the tax haven
country. These range from none to minimal.
The fact that a corporation is practically the only business
structure that can benefit from a Joreign citizen status would
suggest that this book is not for persons who generate income
as individuals, or for owner-managers of partnerships or single
proprietorships. However, because incorporation in virtually all
lax haven countries is quick, simple, and relatively inexpensive,
as a single proprietor or partner you may benefit by incor-
poration, or reincorporation, in a tax haven country.
For a lax haven operation to be viable, there must be some
interaction between the tax legislation of the heavily-taxed
country and that of the tax haven country. This interaction
may be explicit (as in the case of the reciprocal lax treaty) or
implicit. In either case, it sets the scope of this book. It would
be impossible to survey tax legislation of the many major,
heavily-taxed countries (Great Britain, Germany, France, The
Netherlands, United States, Canada, Japan, etc.) Therefore,
this book presents detailed analysis of tax haven country
legislation, and makes only general reference to the principles
that are common amongst the heavily-taxed countries. The
reader should use the information here in conjunction with
sources of tax information on his horne country.
The lax haven legislation of many countries is discussed, and
the incorporation laws of most of these countries are pre-
sented in detail, leaving nothing to guesswork for the
executive-rnanager who wishes to inc1ude tax havenry in a tax-
planning format. In addition, tax haven benefits are categor-
ised (no-tax, special purpose, etc.) for quick reference.
This book does not offer a do-it-yourself kit of forms to final-
ize incorporation abroad. Such a "quicky deal" is as dangerous
as performing a kidney operation on your own wife by using a
do-it-yourself surgical manual. The manual may be all right,
but who in his right mind would risk it? In principle, a "Do-It-
Yourself Tax Haven Manual" is possible; whatever expertise
professionals have in the field could be formulated in precise
and completc detail. However, such a book, if honestly and
Tax Havens - An Introduction 3
competently put together, would be gigantic, and would
amount to a combination of relevant legal training, relevant
accountancy training, and much more detailed information
about the tax and corporate laws of a multitude of countries.
The time required for a layman to digest such a manual would
be worth more than the priee of good professional advice. Try-
ing to avoid both such a detailed manual and the costs of pro-
fessional advice, using a shortcut approach, would be eheaper
in the short run - and much, much more costly in the long
run.
So anyone interested in pursuing any of the possibilities pre-
sented here should definitely get in touch with the best profes-
sional advisers he can afford before going into action. It will
mean risks, expense, and hard work, but properly done, it
could be very much worth it.
In conclusion, use the information presented in this book
for what it is intended - to achieve business growth through
the he1p of 80% to 100% after-tax dollars .
It is hardly possible to begin a discussion of tax havens from
the viewpoint of tax advantages, without considering the under-
lying philosophie concept. In other words, is the organisation -
or reorganisation - of a business in a foreign country for a pur-
pose of tax avoidance entirely legal? And if it is legal, but takes
needed revenue from the country of residence, is it moral?
To consider the first question: a correctly organised tax
haven operation that complies with the laws of the country in
whieh it is organised is as legal from the viewpoint of the
country of residence as the interpretation of that country's tax
laws allow it to be. In this respect, the legal status of a tax haven
company with regard to taxation in the country of residence is
the same as if the company were located in the country of
residence. To state this principle another way, a businessman
who uses space in his horne for business purposes may run
head-on into a revenue service investigation if a disproportion-
ate1y large area of the house is claimed as a business expense
against the income of the business. However, this is not a
matter of legality but of interpretation, and the worst that the
tax investigator can do is to disallow part or all of the space as a
business expense. If, on the other hand, the businessman
attempts to evade income tax by concealing part of his income,
this is a matter of legality, and the worst the investigator can do
4 Tax Havens fOT International Business
is file areport that may eventually result in fines and/or
imprisonment for the businessman. Essentially the same prin-
ciple should be applied in tax havenry: the responsible com-
pany executive should not establish any practices that smack of
tax evasion, but should set up an organisation that is legally
defensible in every respect.
To consider the question of the morality of tax avoidance,
we
In the context of taxation, morality is not considered an
absolute, but a concept which, like the tax laws themselves, is
subject to interpretation. One person might argue quite con-
vincingly that it is morally wrong to tax a working widow with
children to help provide the day-to-day support for a war
veteran who is able to work but prefers not to; and another
person can argue just as convincingly on behalf of the veteran.
The morality of taxation changes with the times. Prior to
World War I, when taxes were comparative1y low, though cer-
tainly not popular, the American worker and small business-
man were exempt from the controversy by virtue of low
incomes. During times of national emergency. particularly
during and directly following World War 11. tax avoidance was
frowned upon even by those who were looking at large tax
Iiabilities each year. But as progressive tax rates brought taxes
higher and higher in highly industrialised and populated
nations, the attitudes of taxpayers underwent a gradual, but
definite change. .
Today, even the individual worker for whom the tax system is
supposedly designed can see that a tax system in which higher
income brackets produce progressive1y higher tax rates is
stultifying to individual initiative and productivity. Business-
men and company executives feel not only duty-bound but
morally obligated to use the legal tax avoidance measures avail-
able to them. Thus, whether the loss of revenue to the nation
is through the use of tax advantages internal to the nation's
tax structure, or through the establishment of a tax haven
company in a foreign country, the tax avoidance principle is
exactly the same. From a pure1y pragmatic viewpoint, legal tax
avoidance by a company may not be the road to wcalth, but
simply a means of economic survival in a time when indus-
trially cmerging nations are becoming major compctitors in
the world marketplace.
Tax Hauens - An Introduction 5
The "losers" in the business of tax havenry are presumed to
be the heavily industrialised, heavily populated, and heavily
taxed countries of the world. If two nations could personify
this description, they would be the United States and Great
Britain. Yet, the attitude of these governments toward tax
havenry is ambivalent to say the least. The United States, for
example, actually established itself as a lax haven for foreigners
by not imposing a withholding tax on interest paid to for-
eigners on their US bank deposits, and allowing foreigners to
buy, hold, and sell securities at a gain without incurring a
capital gains lax liability. There are, of course, economic
reasons to justify these lax rulings (a reversal of the ruling on
interest paid on bank deposits would remove billions of dollars
from US banks, and might cause the financial collapse of New
York City). .
As another illustration, we can consider the attitude of the
United States toward Puerto Rico, a commonwealth in associ-
ation with the United States, which has gained a reputation as
a lax haven for certain US industries. Nearby lies the British
Virgin Islands, a British-eontrolled group, which has deliber-
ately passed legislation to attract foreign investment money. If
we stand on the premise that the governments ofindustrialised
nations are dedicated to stopping lax havenry wherever they
find it, we would nevertheless have to acknowledge that an
intrusion of the United States into the affairs of the British
Virgin Islands could conceivably cause a weakening of rela-
tions between the United States and Britain; however, there
would be no such restraints on the United States as regards
Puerto Rico. And the same could be said of Great Britain: Can
we believe that the British Virgin Islands, with a population of
about 20,000, could establish itself as a tax haven country with-
out the implied consent of Great Britain, of which it is a
colony?
If lax havenry takes needed revenue from industrialised
nations, why then do they not only tolerate it, but see m to
sanction it?
Superficially, in the case of Puerto Rico, lax havenry gives
the Puerto Rican economy aboost. In the case of the British
Virgin Islands (and other British territories or ex-eolonies),
Great Britain believes that it is best for all concerned to give
the islands an autonomy in decisions concerning their internal
6 TaxHavens Jot' International Business
economic development. Further, the British Virgin Islanders
hope that lax havenry will provide enough external income to
make the islands independent of British grants-in-aid within
the next few years. Somewhat the same situation exists with the
Dutch-controlled islands that have established lax havenry to
attract foreign money. This being the case, we can say that
there is no external threat to lax havenry from free world
nations.
Nevertheless, governments of industrialised nations are
ambivalent regarding lax havens. The United States, for exam-
pie, finds it beneficial to spend inordinately large amounts to
investigate lax fraud and evasion within the nation, and also
sends agents abroad to uncover illegal lax schemes set up by
Americans . Everything being equal, however, the lax haven
entity may fare somewhat better in an Internal Revenue Ser-
vice investigation than its US counterpart because most lax
haven authorities refuse to disclose lax information on a for-
eign company unless a tax law of their own country has been
violated, or unless a trcaty compels thcm to make the dis-
closure. Furthcr, the officers of financial institutions will pro-
tect the confidentiality of their clients for two reasons:
.(1) In many of the lax havens (Switzerland, the Bahamas,
and Cayman Islands are a few), there are stiffpenalties imposed
for the unauthorised disclosure of a client's affairs.
(2) Because tax havenry is an important source of revenue
for the tax haven country, the business community has avested
interest in providing an atmosphere of confidentiality for its
lax haven clients.
Nevertheless, there are some types of disclosures that are
required, both within the tax havcn country and to the country
of residence. Despite the tradition of secrecy that seems to sur-
round lax havenry, a person cannot depend on non-disclosure.
As one lax haven counsel said, eWe assurne that the business-
man and his counsel are out to create an honest structure
based on lax laws, and not some silly scheme of hiding their
money in a numbered account and then wondering where the
headlines come from when they get indicted".
In lax haven countries, it is safe to assurne that nothing short
of a revolution will cause radical changes in lax haven status or
create a situation in which company funds or assets are appro-
priated. This is not to say that changes cannot occur in a lax
Tax Havens - An Introduction 7
haven, but they are generally precluded by some triggering
event. In the majority of tax haven countries discussed in this
book the possibility of an internal revolution is practically zero.
CORPORATE TAXES
11
12 Tax HavensJOT International Business
lawyers seek precedents in law that are favourable to their
cases, i.e.,laws by custom.
The United States, as weil as UK territories, inherited the
common law concept from the nineteenth century British legal
system. Therefore, all of the tax haven countries that are or
were territories of the United Kingdom are common law coun-
tries. These tax havens include Hong Kong, Gibraltar, the
Cayman Islands, Bahamas, the British Virgin Islands, Bermuda,
the Isle of Man, and Nauru. Liechtenstein, Switzerland,
Luxembourg, Panama, and The Netherlands are civillaw coun-
tries. Corporations formed in civil law countries are also recog-
nised as legal entities for tax purposes in common law countries.
The corporation laws of Liberia and Panama are patterned on
the Delaware corporation laws ofthe 1920s (see Chapter 6) .
The fact that several of the common law lax haven countries
pattern their companies' laws after Great Britain's does not
mean that the laws are uniform from country to country, just
as thc corporation laws of each US state (and Puerto Rico) are
not uniform from state to state. There are, however, enough
similarities between the laws of the lax haven countries
discussed here and the incorporation laws of the high-tax
countries for the industriaJised countries to recognise com-
panies formed in tax haven countries as corporations for tax
purposes.
When you begin to plan a tax haven company, which is in
effect a foreign corporation, you are faccd with an entirely
different set of criteria from when you form a company at horne.
First, to derive any tax bencfits from a tax haven entity, that
entity must be estabJished as a corporation under the laws of the
country that you choose. The tax haven country should be
chosen in accordance with the activities and financial goals of
the enterprise. Do not ehoose a tax haven eountry beeause ofits
proximity to your horne country, or because incorporation laws
are lenient. Choose simply on the basis of the tax advantages
that the tax haven can offer your particular entcrprise.
Onee you have decided which of thc lax haven countries will
provide the most viable lax benefits for your enterprise, you
Establishing the Foreign Company 13
will have basic decisions to make concerning the corporate
structure. These decisions are somewhat similar to those you
would make regarding a domestic corporation. First, decide
whether the corporation will be public or private.
Just as its domestic counterpart, the foreign public corpora-
tion is one that may have an unlimited number of share-
holders, with shares offered for sale to the general public,
The foreign private corporation (particularly the ones
formed under UK laws) finds its American counterpart in the
dose (or dosed) corporation, which can be formed under UK
law with a minimum of two shareholders.
Major differences between foreign private and public
corporations are:
(l) Under UK law, whereas the shares of a public corpora-
tion may or may not be offered to the general public (unlike in
the Uni ted States where "public" implies the selling of shares),
the shares of a private corporation are held by a restricted
group that may be as small as a husband and wife, and are not
offered for sale to the general public, However, the shares of
a dose corporation can change ownership. The minimum
number of shareholders for a private corporation under UK
law is two. The minimum number of shareholders for a public
corporation under UK law is seven.
(2) Under UK law, a public company must have a minimum
of two directors, whereas a private corporation may have a
minimum of one.
Several of the tax haven countries that are guided by UK
laws will give companies an exempted status. Notable among
the tax haven countries acknowledging the exempt status for
corporations are Berrnuda, Cayman, Gibraltar,Jersey, and the
Isle of Man. A corporation that takes exempted status in one
of these countries receives significant tax benefits, In Cayman,
for example, the exempted company may receive these
advan tages:
(1) It may issue no-par value shares.
(2) It may issue bearer shares to non-residents. This may be
an important advantage, as it makes possible the transfer of
stock - and therefore of ownership - without a disclosure of
the new owners.
(3) The names of the shareholders are not on public
record, nor are they required to be disclosed.
14 Tax Hauens JOT International Business
(4) Cayman exempt companies receive a guarantee from
the Cayman government that no income tax will be imposed
for the next 20 years. However, this is a doubtful advantage,
since there is little likelihood that income taxes will be
imposed in the Caymans within the next 20 years.
A Cayman exempt company costs considerably more to start
and operate than an ordinary company. When this is com-
bined with yet another disadvantage, namely that the exempt
company raises the question of "legitimate business purpose"
with the horne country tax authorities, the value of an exempt
company may be questionable.
In some jurisdictions, the minimum capital is set by law;
in others there is no minimum required for capitalisation.
Switzerland, as an example, requires a minimum of 50,000
francs for capitalisation; the Caymans and Hong Kong have no
minimum requirement for capital,
The minimum number of shares to be issued by any company,
public or private, is established by the law of the tax haven in
which incorporation is sought. Above this minimum, the num-
ber of shares to be issued by a public company depends on such
practical considerations as the amount of capitalisation, the par
value of the shares, etc. In the private corporation, the number
of shares issued is usually held to aminimum, since filing fees
are often determined by the number of shares issued.
If you are incorporating in a tax haven that allows the
exempted company, you must decide whcther to form the
ordinary or exempted company. If this decision is irrevocable
(as it is in the Caymans, for example), the decision should be
carefully considered.
Normally, two documents are required in the forming of the
foreign corporation in common law countries: the memor-
andum of association and the articles of association.
Memorandum of Association
Establishment in a tax haven does not solve all the tax prob-
lems of every conceivable case. The selection of a tax haven
has to be made in accordance with each company's needs and
special requirements. For example, if a particular tax haven
has internal tax laws favouring a certain business situation, but
the country of residence has anti-avoidance legislation that
counteracts thc tax havcn advantages, these factors must be
weighed in making the decisions.
Moreover, in certain situations, a combining of tax havens
can result in a better tax advantage than using a single tax
haven that has no internal taxes on certain income.
18
Who Can and Cannot Benefitfrom Tax Haoens 19
soon be solved as a nctwork of lax havens are establishcd with
the intent ofwooing foreign manufacturers with 10- to 15-year
lax holidays.
Iflocal conditions are favourable to a certain manufacturing
operation, a plant may be established in a lax haven to manu-
facture and seil or lease its products to the parent company
without lax liability. Also, such a lax haven company can organ-
ise to manage the foreign sales, etc. of the parent company,
thus minimising laxes in the parent company's country of
residence.
If a ship service (or an airline service) engages in inter-
national activity, it may find itself in a position to establish a lax
haven company to minirnise, or completely avoid, laxes on
such activities as bunkering, leasing, hiring, etc, Many lax
havens are flag-of-eonvenience nations, allowing foreign ship
owners to register under the lax haven flag, to avoid laxes, eco-
nomic restrictions, and the various rules and regulations of
their own nations.
Favourable ship registration laws attract shipping companies
to incorporate in Liberia and Panama. However, the Bahamas,
Berrnuda, Cyprus, Hong Kong, the Isle of Man, Malta and
others are offering inducements that should attract a portion
of this market from Liberia and Panama. Greece has enacted
legislation to encourage foreign shipping companies to estab-
lish offices there. Thc benefits under this legislation, which are
many, apply to customs duties, vehic1e registration fees, and
income tax, This creates a situation in which a shipping com-
pa ny could obtain tax advantages by incorporating in Liberia
or Panama, and maintaining its head office in Greece. Since
few countries tax the fees collected for foreign shipping com-
panies, tax havenry is particularly weil suited to the shipping
industry.
Because of favourable laws in both the United States and
Great Britain, there is a good potential for lax savings in the
establishment of mutual funds in offshore lax havens.
International investment companies are in a favourable posi-
tion to make investments in Britain and the United States,
because the British and American requirements regarding the
length of time a security must be held to qualify for the lower
capital gains tax rate does not apply to lax haven companies.
Mutual funds or investment trusts can be established in a lax
20 Tax Havens for International Business
SUMMARY
Example 1
An American-based myrtlewood manufacturing company
manufactures myrtlewood novelty items and seils them to its
Berrnuda-based company, who in turn seils them to dealers
around the world at a profit. By careful pricing, the parent
company minimiscs its profits, and the Bermuda-based com-
pany accumulates profits tax-free with no US penalty, because
thc incomc is from "sale of goods manufactured, produccd,
grown, or cxtracted in the United States".
Exampie2
A British company with shipping interests forms a Bermuda
company to charter, manage, and operate ships that are
involvcd in commerce around the world. The income to the
Bermuda-based company is tax-free in Bermuda. Bermuda,
incidentally, welcomcs this kind of tax havcn enterprise.
24 Tax Hauensfor International Business
Example3
A Hong Kong company that assembles watch, clock, and
related mechanisms joins with an American company that
cases and packages the mechanisms for world-wide distribution
to form a Panama-based sales company. The Hong Kong and
American companies each own 50% of the Panamanian com-
pany. The Panamanian company handles the sale of the
watches, etc. in various countries around the world, through
dealerships. Since the Panamanian company is not American-
controlIed, it can accumulate profits from non-US sales.
Example4
A Japanese company joins with a Netherlands company to
establish dealerships around the world in pocket calculators
and related electronic consumer items. These two companies
form a Hong Kong company to procure the components and
assemble and package the items. The Netherlands company
owns a controlling interest in the Hong Kong company. The
Hong Kong company in turn forms a Cayman Islands-based
company as a liaison and distribution point for sales to world-
wide dealers. Profits from world-wide sales can accumulate in
the Cayman company free of lax.
Example5
Several food processors joined together. to form a casualty
insurance company in the Isle of Man for the purpose of
insuring the companies against claims for botulism and other
food-related diseases. Because of the wide distribution of the
various products, there is the potential for claims to become
widespread and catastrophic. The Manx-formed insurance
company will also be empowered to insure risks outside the
constellation of the parent companics.
ESTABLISHING OF HEADQUARTERS
Bermuda
Bermuda has become an important offshore tax haven in
recent years, due in part to its convenient location, its thriving
business community, and the fact that it is virtuaUy tax-free .
Bermuda has no income tax, no capital gains tax, no withhold-
ing tax on dividends, interest, etc. and boasts, furthermore,
that there is no discrimination in Bermuda as regards taxation.
The foreign corporation can accumulate income, from either
internat or external sources, fuUy tax-free in Bermuda.
Bermuda has no double taxation treaties with other nations.
Bahamas
In the Bahamas there are no income taxes, no capital gains or
wiLhholding taxes, no corporate taxes, and no estate duties.
There are no double taxation treaties with other nations. A
pleasant cIimate and proximity to the US make the Bahamas a
favoured tax haven for US businessmen.
Cayman Islands
In the Cayman Islands, there are no income taxes, no cor-
porate tax, no estate tax, no inheritance tax, no sales tax, and
no property tax. Cayman company legislation aUows exempted
26
Tax Haven Classijication 27
eompanies to be formed with a guarantee of no future taxes,
usually within the next 20 years. The Cayman Islands have no
double taxation treaties with other nations.
HongKong
A Hong Kong eompany is Iiable for tax only on the portion of
ineomc derived from loeal business . Ineorporation in Hong
Kong ean be relatively fast, and the fees are modest. Hong
Kong is an attractive, flourishing, modern city. It is a favoured
Ioeation fur eertain manufaeturing enterprises because its
Ioeation provides aeeess to Iabour, raw materials, and Asian
markets. Hong Kong-based enterprises are usually pereeived
by domestic revenue authoritics as serving a legitimate
business purpose.
Panama
A Panama-based company not doing business in Panama is not
required to file annual reports, There is no withholding lax on
bank interest aeeumulated in loeal banks, and the Colon Free
Zone offers some important duty advantages to foreign
businesses. It may be wisc to investigate the politieal situation
in Panama when you contemplate establishing a eompany
there. However, politieal strife in Panama has never had an
adverse effeet on foreign business operations.
Gibraltar
Gibraltar is a self-governing British eolony loeated on a
prornontory at the western end of the Mediterranean. Its lax
haven legislation allows the exempt eompany to be fully
exempt of ineome and estatc laxes. To mcet the exempt
requirernent, the eompany must generate no loeal ineome and
must be owned by non-residents. The eertificate of exemption
28 TaxHavensfor International Business
allows this tax-free status for 25 years. Therc is also a company
called a "qualifying company", which is similar to an exempt
company, but pays a low rate of income tax, which can some-
times be beneficial to a holding company in The Netherlands,
which exempts dividends received from a subsidiary which has
paid some tax.
Jersey
Jersey (in the English channel, betwcen England and France)
legislation provides exemptions for non-resident companies,
and local taxes are only 20%.
Guernsey
Located ncxt to Jersey, with somewhat similar legislation to
Jersey.
Liberia
In addition to no tax on foreign source income of companies
owned by non-residents, Liberia has no exchange control regu-
lations, no reporting requirements, and is a favoured country
for ship registration.
Isle ofMan
Part of the United Kingdom, and located in the Irish Sea
between Ireland and Great Britain, the Isle of Man has become
one of the most promoted European tax havens in the last few
years.
Cyprus
Cyprus is located at the eastern end of the Mediterranean,
which has made it particularly useful for companies engaged
in tradc or services in thc Middle East. Depending upon the
structure used , there are no-tax or low-tax possibilities. Cyprus
also has a useful network of lax treaties.
Malta
Malta has only recently become a lax haven, but has a long
history of stability and neutrality. It has special legislation
for holding companies, trading companies, and shipping
companies.
Tax Hauen Classification 29
SPECIAL LEGISLATION FOR REGIONAL OFFICES OF
MULTINATIONAL COMPANIES
The Philippines
The Philippines passed complex tax haven laws with the stipu-
lation that foreign firms must spend $50,000 annually for
local services, supplies, etc. It was expected to attract Asian
regional offices, but in practice few companies have taken
advantage of the legislation, because of questions of political
stability.
Jordan
jordan offers an excellent package of tax benefits to the for-
eign firm, as weil as to personnel who manage thc foreign
branch. The country has modern facilities and friendly people.
Greea
The tax haven legislation of Grecce is similar to that ofjordan.
It attracts many foreign companics with shipping interests.
Apart from the legislation favouring regional offices, that are
allowed 100% tax exemptions for qualifying activities, Greece
has a complex system of tax laws.
Tunisia
Tunisia has recently passed legislation similar to that in Greece
andjordan.
The Netherlands
Although a high-tax country, The Netherlands is one of the
best tax havens for holding companies, finance companies,
and royalty companies receiving income from patents, trade-
marks, and copyrights.
30 TaxHauens for International Business
Austria
Another high-tax country with special tax laws for inter-
national holding cornpanies.
Both The Netherlands and Austria have extensive tax treaty
networks which can work with their special cornpanies.
Luxembourg
Luxembourg is a traditional haven for large holding corn-
panies and international investment funds sold to the public.
It is otherwise a high-tax country, and its treaties do not apply
to the special cornpanies incorporated there.
5 Tax Havens with no
Income Tax
31
32 TaxHaoens JOT International Business
Finally, all of these natlons, in view of their restricted land
areas, depend on tourism and foreign investment for eco-
nomic success. The tax haven industry is an economic
ncccssity for each of them, and any attempt to change this by
future governments is improbable to say the least.
All in all, the consideration of stability is very much in favour
of these no-tax havens. They have been no-tax countries for
many, many years, and they have both traditional and practical
stakes in staying that way.
However, all these havens share a major disadvantage: It
is very difficult to establish plausible business reasons for
incorporating in them. The names Bahamas, Berrnuda, and
Cayman Islands are immediately suspect in theeyesof any tax
collector.
TheBahamas
This is a very traditional tax haven. Gcographically, it is an
archipelago. It is composed of 700 islands and uncounted
rocks and reefs, stretching from Haiti on the southeast to
Florida on the northwest. It has a total land area of 5,400
square miles, scattered over 70,000 square miles of ocean.
The Bahamas are usually associated with pleasant tourism.
Clearly, a country where the major means of transportation is
boats sailing across vast stretches of tranquil ocean has its fas-
cination. The pleasant climate is an extra consideration. The
sun almost always shines; the tcmperature varies only s1ightly
the year round, from an average minimum of 70 degrees
Fahrenheit to an average maximum of 80.
An archipelago Iike the Bahamas can only be organised
po1itically and economically if there is some major island to
serve as its centre of trade and government. For the Bahamas,
this is New Providence; it contains 50% of the total population
and the capital, Nassau .
Economically, the Bahamas thrive on tourism, the tax haven
industry, and the export of petroleum products, cement, rum,
salt, and ocean products, It has no heavy industry, but the
export trade is a good business reason for being there, as is
tourism.
The Bahamas are highly accessible. Nassau can be reached by
air from any major airport in the United States, and it is but 35
minutes flight-time from Miami. There are direct flights from
Tax Havens witk no Income Tax 33
London, Toronto, Jamaica, Bermuda, Frankfurt, Cologne,
Brussels, and Luxembourg.
Communications are no problem. Everyone speaks English,
and airmail, telegraph, direct-dial telephone, and telex ser-
vices are of the highest quality.
The Bahamas are a sovereign state within the British Com-
monwealth, independent since 1973. Commonwealth rnem-
bership means that Her Majesty the Queen is head of state,
and she is locally represented by the appointed governor gen-
eral. This provides a measure of safety because the governors
general have traditionally been very conservativc. The legisla-
ture is bicameral, the upper house appointed by the governor
general on the approval, recommendation, and joint agree-
ment of the prime minister and the leader of the opposition,
and the lower house popularly elected. The upper house can
delay any legislation, though eventually it must approve it.
The governor general can veto any legislation he deerns
inconsistent with the constitution.
Howcver, there are political snakes in the Bahamian paradise.
The government has created problems both in the granting
of work permits to aliens and in exchange-control matters.
Both difficulties derive from programmes of "Bahamisation of
the economy" and "social development". However, the same
government has also put into force some programmes of
encouragement to forcign investors and tourism, so the situ-
ation is less ominous than some rumours would have it. More-
over, the government has repeatedly promised that it will not
buck the no-tax tradition.
As noted above, the legal system of the Bahamas is grounded
on the English common law. This tradition is implemented by
a four-Ievel court structure: local magistrates, magistrates'
courts for more serious matters, a supreme court, and a court
of appeal. The ultimate court of appeal is that of the whole
Commonwealth, the Queen's Privy Council.
The currency and exchange-control picture is not a rosy
one. The local currency, the Bahamian dollar, is on par with
the US dollar, but it does not freely circulate with it. Exchange-
controls are quite strict, espedally as applied to so-called res-
ident companies: those owned by a loeal resident and doing
business loeally. These companies are only allowed to operate
with loeal dollars and to pay foreign bills with US dollars
34 Tax Havens for International Business
exchanged according to the official rate, each time with an
express Exchange-control permission. This can be an Import-
ant consideration if any local activity is contemplated.
These are ways to avoid this difficulty. One is the formation
of a non-resident company funded by a non-Bahamian com-
pany headquartered in another haven. Another arrangement
is to get a general approval from Exchange-control to convert
freely between local and foreign currencies on the basis of
evidence that the nature of the company requires such free-
dom to do business effectively. Such a license for a resident
corporation involves an extra obligation: an annual report to
Exchange-control on the company's foreign accounts and
transactions.
Onlya non-resident company owned bya non-resident and
operating exdusively outside the Bahamas can do business
with complete freedom of exchange between currencies. This
exchange-control problem, coupled with difficulties that may
be faced in getting a work permit for any non-Bahamian
worker one might wish to employ, may be reason enough for
some investors to look elsewhere for a haven. Still, there are
thousands of corporations registered in the Bahamas, which
indicates that, while they have become slightly less attractive
for a haven, they still have their advantages.
Let us concentrate on these advantages. Whatever profes-
sional services one might need -Iaw firms, accountants, banks,
finance companies, investment advisors, stockbrokers - are
available in abundance. They are of an internationally high
quality, too, based on a long-standing and thriving tax haven
industry.
At; for the tax laws, there are no personal income taxes, no
corporate taxes, no profit taxes, 110 capital gains taxes, no
estate 01' other death duties. On the island of New Providence
there is a tax on the value of improvcd land. A more serious
qualification is the tax on local gambling casinos by which the
government gets its share of this lucrative element of the tour-
ist industry.
In accordance with the general no-tax situation, there is no
withholding tax of any kind.
The lack of any significant taxes in the Bahamas does not
mean that a company will get off scot-free. After all, the local
government does deserve something in return for providing a
Tax Havens with no Income Tax 35
tax haven. Whatever one pays, however, will bear no relation to
his profits. There will be stamp dues on the documents of cor-
porate registration and an annual business-licence fee. The
rates are quite competitive with other tax havens.
There are two basic types of corporations: companies limited
by shares, and companies limited by guarantee. Both types
belong to the general kind of corporate entities discussed
earlier, but there are certain differences. Companies limited
by shares have a fixed, unmodifiable authorised capital. They
cannot buy back their own stock.
Companies limited by guarantee can reduce their share
capital by buying back their shares and cancelling them. This
means that they can present their creditors with an unpredict-
able security situation. The security for bonds, debentures, and
other loans is, of course, the total authorised and real capital
of the corporation.
Offshore funds, with thcir typically expanding-contracting
capital, are therefore incorporated in the Bahamas as compa-
nies limited by guarantee.
Incorporating in the Bahamas requires the services of a local
lawyer,who will prepare and file a memorandum of association
and artic1es of association. Both documents are standard, and
the first inc1udes the name of the company, the address of the
local registered office, its general purpose and objects, a declar-
ation that it has a limited liability of the relevant sort, and the
company's capitalisation (total authorised capital, the number
and kind of shares, etc.). The artic1es of association specify the
number of corporate directors and regulations concerning
annual directors' meetings. On the latter point, the directors
can meet anywhere, not necessarily in the Bahamas. "Alterna-
tive directors" can stand in for the regular directors, and a cir-
cular, agreed to and signed by a majority of the directors, can
have the same official standing as any decision reached by a
majority at a regular directors' meeting.
The local law firm handling incorporation will charge cer-
tain fees: the charges for preparing documentation; the costs
of providing five local nominee shareholders (who will sign a
"deed of trust" turning over their shares to a principal after
incorporation); and costs of maintaining (according to long-
standing, though unwritten tradition) a local nominee director;
and the cost of "office representation" in the Bahamas (a sign
36 Tax Havens JOT International Business
displaying the company name must be posted on the building
in which the registered office is located). In addition, there are
certain statutory requirements that must be met: a register of
directors, a register of shareholders, and aminute book must
bc maintained in the local office, and an annual return must
be submitted to the Registrar of Companies, specifying share-
holders, directors, officers, the address of the registered office,
and amount of share capitaI.
As against government fees, which are fixed, there is some
variation in the fces for the above services. On the average, in-
itial incorporation costs run about $2,500. Of course, one can
shop for the least expensive services and do a bit better.
Bermuda
Bermuda is similar to the Bahamas in many respects. Like the
Bahamas, it is made up of islands, seven main ones, connected
by bridges, and many small coral formations, accessible from
the main ones by boat. It is situated about 600 miles east of
Cape Hatteras, North Carolina, and so, Iikc the Bahamas, it is
close to the East Coast of the United States. Its land arca,
however, is much smaller, a mcre 20.5 square miles, of which
two are occupied by US military bases. The remaining area
is denscly populatcd. Understandably, land purchascs in
Bermuda are difficult, both legally and financially. This is
reflected in office ren tals and so on,
Bermuda is a tourist's delight. Its moderate climate is
warmed by the Gulf Stream. Its area is hilly, with beautiful
banks of flowers and rainbow-hued houses.
It is highly acccssibie. Daily flights connect it with any major
city in the world; it is but two hours from New York. It is
located at the crossroads of the shipping lanes between the
United States, Canada, northern Europe, and South America.
Direct-dial telephone, cables, telex, and airmail services are
excellent.
There are few political differences between Bermuda and
the Bahamas. Bermuda is a self-governing crown colony and
so is not afully independent Commonwealth member. It has a
governor, appointed by the Queen. This iIIustrious official has
largcr responsibilities than his Bahamian counterpart. He
handles foreign relations (in accordance with British policy),
Tax Hatsens with no Income Tax 37
security, and police. All other affairs are monitored by the
democratic institutions of the colony.
The legislature is bicameral, with an appointed upper house
(the Legislative Council) and an elected lower house (the
House of Assembly). The governor heads the cabinet (the
Executive Council). Despite foreign affairs and defence rela-
tions with Great Britain, there exist no governmental financial
relations between the colony and the mother country. All
Bermudian officials, including the governor, are paid out of
local government revenues, and Great Britain gets no lax
money from Bermuda. Thus, the high British taxes have no
bearing on the tax situation in Bermuda. The self-governing
nature of Bermuda means that any changes in the tax laws 01'
other legislation cannot be imposed from without; they can
only emerge from the local legislature.
The legal tradition in Bermuda derives from an ancient, pre-
1612, British common law, modified by locally generated
common law. The legal framework is three-tiered: magistrate
courts, a supremc court, and a court of appeal. As in most
Commonwealth countries, the ultimatc court of appeal is the
Queen 's Privy Council in London.
The local currency, the Bermudian dollar, is on par with the
US dollar. As in the Bahamas, there are exchange-controls on
residents and resident companies.
Bermuda is similar to the Bahamas in having a large range
of high quality professional services available. Very strict bank-
ing legislation has resulted in there being only foul' banks
which, by law, are locally controlIed; local stock ownership,
combined, cannot legally fall below 60%.
The British tradition in Bermuda means that there are
strong ties between accountants, lawyers, trust companies, and
banks. Onee one ehooses his aceountant, say, this gentleman
will "strongly recommend" the lawyer, trust company, and bank
to be used, stressing that he is "accustomed" to working with
them. This may seem a bit restrictive, but it guarantees good
eooperation between firms that otherwise might not cooperate
in one's best interests.
As in the Bahamas, local bank deposits have certain attract-
ive features: the depositor can choose the currency, there is no
withholding 01' other tax on interest.
38 Tax Hauens JOT International Business
Ni for taxes, there is no personal income tax, no corporation
lax, no profits lax, no capital lax, no capital gains lax, no with-
holding lax, no inheritance lax. There are import duties and a
10% property levy on the rental value of houses and land.
Incorporation in Bermuda was made simpler in 1970. Previ-
ously, incorporation required a special private legislative act,
To incorporate one had to offer a petition to the local parlia-
ment through a legal representative. The legislature would
then vote on the proposal and, eventually, approve it. This
superceremonious method of incorporation still exists and
must be used if any aspect of the structure, internal organisa-
tion, or mode of operation of an intended company deviates
from the pattern dictated by the General Corporation Law
enacted in 1970. However, if the corporation is a "normal"
one, incorporation can be accomplished without such legislat-
ive ceremonies by submitting the standard type of documents
for the Registrar of Companies.
There are two basic types of companies recognised by
Bermudian corporate legislation: local companies and exempt
companies. Local companies are those formed by Bermudians
for purposes of internal trade or Bermuda-based international
trade (import to and export from Bermuda). Such companies
have a minimum percentage of local stock ownership, pre-
scribed by law, are subject to strict exchange-control, and have
no guaranteed immunity against future laxes.
An exempt company is free of the first two restrietions
above, and is given an official guarantee against the levying of
future laxes for 30 years. However, an exempt company is
restricted as folIows: (l) It cannot buy, lease, or seil land, rnort-
gages secured by land, or bonds and debentures secured by
land without special permission. (2) It cannot buy shares of
local companies. (3) It cannot locally seil whatever it produces
without special ad hoc permission. These limitations narrow
"business justification" possibilities for Bermudian incorpora-
tion, to say the least, and there is no way around them.
Incorporation in Bermuda is more difficult than in the
Bahamas. Taking into account the various professional services
that are needed for incorporation as weil as the high govern-
ment fees, both incorporation and annual maintenance run to
$2,000-$2,500 a year depending on the specific services
required .
Tax Hatsens with no Income Tax 39
In addition to the financial burdens, there is a "screening" of
incorporation applications. A committee chaired by a member
of parliament examines bank references to eliminate Mafia
types and such. This screening slows things up, and may take a
month.
Even if the disadvantages notcd above do not discourage a
potential investor, the Bermudian political and sodal situation
may. There is a policy of "Bermudisation", There are problems
with immigration and work permits for aliens; renting a local
office is difficult in view of the land restrictions; and the distinc-
tion between local and alien companies is very strict. Local com-
panies pay a 5% "payroll lax", which means thaton each $100 an
employee gets, the company has to pay the government an extra
$5. This does not apply as yet to exempt companies and they
are, moreover, guaranteed against it. But this is a bad sign for a
lax haven. (Remember, US incomc lax started at 5%.)
Thus, given a choice between Bermuda and the Bahamas,
the Bahamas may make the bctter bel. The only advantage
ßermuda seems to have is the extra respectability conferred
on ßermudian companics by the screening process.
44
Tax Havens witk no Tax on Foreign Source Income 45
very good business (as opposed to tax) motivation for it: cheap
locallabour, excellent possibilities for international trade, etc.
A Bermudian exempt company, however, instant1y suggests tax
avoidance to a suspicious mind.
Another general advan tage of these havens is that their
governments usually want foreign investment. In some of these
countrics, forcign investors get preferential treatment that may
not mcan only tax advantages, but subsidies, marketing privil-
eges, etc. So let us look at these unusuallands.
Panama
Panama deserves first mention here because it is already so
widcly used by corporations as a base for their foreign opera-
tions. It is notable for the combination of tax and business
advantages it offcrs, dcspitc the recent invasion.
A major reason for the popularity of Panama is its location.
It is the link between North and South America, and it
includes the famous Panama Canal, connccting the Atlantic
and the Pacific. Its total land arca is 29,700 square miles, The
majority of the pcople (60%) live off the land. The capital,
Panama City, contains most of the urbanised population and
most of the rest live in the other major city, Colon. Colön's
significance, economically, derives from its freeport facilities,
which wc will discuss later.
A visitor to Panama is in no danger of freezing. The c1imate
is tropical - hot, with heavy rains (50 inches a year on the
Pacific side, 150 on the Atlantic). There is a dry season from
mid-December through to the end ofApril.
One can rcach Panama more easily than virtually any other
tax haven. Many airlincs serve Panama. If sea travel is pre-
ferred, Panama has four cxccllcnt ports: Cristöbal at the
Atlantic end of thc Canal, Balboa at the Pacific end, and Puerto
Arrnuelles and Bahias de las Rouge.
Tclecommunication is extremcly efficient because Panama is
an international crossroads of trade. There is direct telephone
service via satellite and vcry reliable telex, cable, and airmail.
Politically, Panama is a republic. It has a democratic election
system that cvery six years produces a turnover in the
unicameral legislature, the National Assembly, while the "chief
of state", the president, and the vice president are clected by
the assembly. The chief of state is the chairman of the national
46 Tax Havens JOT International Business
cabinet and roughly corresponds to the prime minister in a par-
liamentary government The National Assembly has the job of
cxamining and approving or disapproving legislation drafted
by anational legislative commission. Panama until recentJy has
been a typical Latin American dictatorship run by whoever hap-
pens to be in charge ofthe National Guard (army) , with alI the
republican and democratic trappings as mere window dressing.
Since the US invasion the dcmocratic process seems to be func-
tioning again. However, the military leaders - even the leftists -
never seemed to tinker with the lax and corporation laws.
There is a kind of cconomic freedom absolutely unaffected by
political turnover, The rulers have not slain the goose that lays
the golden eggs.
Another indication of the considerable independence and
stability of economic policy is the structure of the Panamanian
civil service and government. We are used to a public bureau-
cracy in which each department is headed by a political ap-
pointee to a ministerial/secretarial position. In Panama a variety
of governmental functions are handled by purely bureaucratic
agencies. Electridty and hydraulic resources, national telecom-
munications, tourism, social security, all these functions are
handled by semi-autonomous official Institutes, which are not
under any cabinet minister.
Spanish is the official language, but English is very widely
used. Most professionals and businessmen speak English.
A very pleasing feature of Panama is the absolute monetary
freedom. The loeal Balboa is on par with the US dollar and
exehanges freely with it. All paper money is American. The
lack of exchange controls implies that the government cannot
regulate the money supply, and there is no central bank.
Add to this banking legislation comparable to that of the
Switzerland of old: numbered accounts in the eurrency the
aecount holder designates and seerecy laws.
The eentral position of Panama in inter-American as welI as
transoceanic trade means that its professional services -
banking, aecountancy, legal, brokerage - are of the highest
quality and intensely competitive. There are many banks, both
local and international. Name any major international
banking organisation and it has a branch in Panama.
There are many Panamanian management eompanies that
can handle local corporate creation and management in all
Tax Havens with no Tax on Foreign Source Income 47
necessary aspects. They play a role analogous to that of
Bahamian and other trust companies. They will handle any-
thing and everything: incorporation, registration of assets, pro-
vision of all required nominee officers and directors to cover
the various requirements of corporation law, etc. They will
even conduct feasibility studies on the advisability of altern-
ative possible investments.
Panama taxes locally generated income and exempts from tax
all income generated abroad. This policy has existed since the
country was founded in 1903, good reason to believe that the
policy is too weil entrenched to be changed with ease. The
income tax on the local income of residents is progressive
to 46%. If one is in the country less than six months in a year
and generatos local income, he is not exempted from tax
altogether or cven allowed to "spread" his incume over the
whole year. Rather, he pays taxes on a pro rata basis; the ratio of
Panamanian residence duration to a full year is the basis for cal-
culation. Thus, Panama is not ideal for all expatriate branch
managers.
On the bright side, all income generated by movement of
commodities that never pass through Panama (even though
they may be invoieed in Panama and managed from a
Panamanian office) is complctely cxempt from taxation . Thus,
there are good business reasons - "business motivation" - for set-
ting up a Panama-based corporation. Moreover, if dividends are
paid to stockholders residing outside Panama, no withholding
tax applies, provided the profi t underlying the dividends is all
derived from sources external to Panama. Similarly, if one in-
herits property owned by a Panamanian corporation (by inherit-
ing the stock) and the assets themselves are outside Panama, no
inheritance taxes apply.
The fact that overseas operations based in Panama are not
taxed, together with easily demonstrated business motivation
for Panamanian operations, the frec exchange of currencies,
and the economieally strategie position ofthe country account
for the 35,000 corporations, mostly foreign, that are registered
in Panama - more than in any other tax haven. This large cor-
porate presence is, in itself, the strongest guarantee of future
preservation of the tax-free foreign income policy. Any change
of this policy would scare off most of the 35,000 cornpanies,
terminate the flow of monc'y they feed into the Panamanian
48 Tax Haoens for International Business
economy and the government treasury, and thus would be a
vast net loss. The free market situation in the international tax
haven industry, following from the existence of many altern-
ative havens all competing for patronage, should keep Panama
very much "in line",
Panama's principal claim to farne as a haven for foreign
companies is based on the shipping industry. Like Liberia,
Panama offcrs special advantages for ship owners who elect to
fly its flag as a "flag of convenience". The cost of ship registra-
tion in Panama is low. Even if a shipping company regularly
imports and exports from and to Panama, none of its income
or profits (or the salaries of its crews, for that matter) are
subjcct to any Panamanian tax. Moreover, Panama's maritime
labour regulations arc liberal.
Let us now revicw Panamanian corporate law. Fortunately, it
is bascd on thc DeIaware laws of 1927 (without amendments).
As the reader may know, Delaware is one of the best US states
in which to incorporate because ofits very advantageous corpo-
ration laws. In Panama incorporation rcquires two incor-
porators, who must execute the articles of incorporation
before a Panamanian notary public. These two are usually
nominees, employces of a local managcment company. The
articlcs of incorporation arc recorded at the public rcgistry
office, and the latcr costs of maintcnance can be reduced to a
$100 annual fee to a local legal representative. Nominee
"incorporators", though nominally shareholders at the time of
incorporation, will sign a deed of transfer returning their stock
to thcir principal(s) after incorporation has been cffected.
Thc articles of incorporation must include the usual details:
company name, with the standard designation for a corporate
entity, (2) astatement, howevcr general, of the objects of the
corporation, (3) capitaJisation, specifying both the total amount
of authoriscd capital and its division into shares with their
respcctivc par values (shares with no par valuc can be issued, but
then the govcrnment assumes that each sharc has the nominal
par value of $20 for the purpose of computing the registration
tax), (4) specification of thc nature of thc shares - registered or
bearer, common or preferred, voting or nonvoting, (5) names
and addresscs of at least three directors (usually nominees
hired for an annual fee), (6) names and addresses of officers
(again, nominees - who can be the same individuals serving as
Tax Havens with no Tax on Foreign Source Income 49
dircctors), (7) thc duration of thc corporation, which can be a
specificd limited period or "forever", (8) name and address of
the loeal legal representative of the corporation, and (9) the
domicile of the corporation (e.g., Panama City, Panama).
Incorporation costs are usually $1,000-1,200 .
Annual corporate maintenance costs very little, about
$100- $200. The low fces stem from the fact that the loeallcgal
representative has only to exist; he has no reports to file nor
any other work to do,
Thus, neither incorporation nor company maintenance is
very expensive in Panama. It is certainly much less expensive
than the comparative action in Bermuda, the Bahamas, or the
Caymans. And one gets the same tax advantages for income
generated outside the eountry. Moreover, therc is a further
advantage to be enjoyed by Panamanian eompanies that deal
exdusive1y outside Panama. They need keep no financial re-
cords locally, nor do they have to submit any annual financial
reports with the local tax authorities, What has to be kept
loeally is a stock-register book for registered stock and a
minute book for meetings of shareholders. The latter must be
rubricated (for a special fee) by a loealjudgc. It is also bound
in such a way that the minutes must be entered manually;
typed minutcs cannot be filed in it. This, though, is just an
unimportant nuisance, not a serious consideration.
Another nuisance concerns stockholders' meetings. If not
physically held in Panama, these have to be officially sanc-
tioned by the Panamanian consul in the country where they
are held and then registered in the minute book in Panama.
Altcrnative1y, thcy can be made official by the signature of the
corporate secretary, the person whose name is reeorded in the
mereantile rcgistry as the corporation's secrctary. Again, th is is
merely a curiosity of some slight inconvcnience, not a major
problern.
If however, a company does local business in Panama, it
becomes subject to taxes on its locally generated income. In this
case, a generaliedger, a general journal, an inventory, and a bal-
ance sheet must be maintained. A commercial business licence
mayaiso be nceded. This could be bypassed by handling Pana-
manian business through a corporation domiciled in, say, the
Cayman Islands. The Panamanian withholding Lax is lower than
thc corporate income tax on loeally operating companies.
50 TaxHavens JOT International Business
In any event, if a Panamanian corporation is not in any way
directly involved in domestic business activities in Panama, no
annual report of any kind has to be made. Even interest gener-
ated locally on local bank deposits is free from any local tax or
withholding tax. Thus, for a sum of about $1,000 for incor-
poration and $100-$200 a year in maintenance costs, a com-
pany can enjoy virtually complete business privacy - no
reports, no books, no anything.
Another advantage of Panama, apart from its very private
corporations, the low costs ofannual maintenance, and the free
exchange of currencies, is the Colon Free Zone. Located at the
Atlantic entrance to Panama and accessible by air and sea from
every corner of the Western Hemisphere, it is very active eco-
nomically, with an annual trade volume of about $950 million.
It has attracted international companies from the United
States, Japan, and Europe. Its freedom of trade involves com-
plete exemption from duties on merchandise imported into it,
packed, labelIed and/or assembled in it, and reshipped from it.
Moreover, no commerciallicenses are needed.
How to use the freeport facilities depends on the size of com-
mercial operations one intends to conduct from them. Land can
be leased there, and warehouse or other faciIities can be buiIt on
it. The usual lease is for 20 years and is renewable. Warehouse
space can be leased too. Finally, local warehouses are also avail-
able for fees based on the value of the total merchandise stored.
Clearly, the leasing of space and construction of warehouses for
hire is a lucrative business possibility in the Free Zone.
Unfortunately, the freeport although duty-free, is not totally
tax-free. Merchandise that physically passes through the Colon
area and is subject to some form of local processing - re-
packing, labeling, etc. - is taxed by the Panamanian govern-
ment. The tax rates, however, are extremely low. They are based
on a 1954 income tax law, under which corporate income tax
was but 30% on net profit. Add to this a 90% "tax discount"
applicable in the Colon Free Zone, and the result is a negligible
3% tax on net profit from all merchandise that physically passes
through Colon not later sold in Panama. (Standard taxes apply
to all Free Zone goods resold in Panama.)
Summing up, Panama has an impressive array of advantages
over its competition: (1) No exchange controls, no federal
reserve or central bank, complete monetary freedom. (2) No
Tax Hauens witk no Tax on Foreign Source Income 51
taxes and no required financial 01' other annual reports by
corporations doing business exelusively outside Panama. (3)
Relatively low incorporation and annual maintenance costs,
with a rieh array of professional services to take care of every-
thing. (4) The possibility of safeguarding privacy with both
bearer shares and numbered bank accounts in the currency of
the depositor's choiee with tax-free interest. (5) The possibility
of dabbling in the shipping industry with minimal govern-
mental costs, costs that are a low function of tonnage and are
unrelated to profits. (6) The prospects of doing business
through the Colon Free Zone, duty-free and alm ost tax-free, (7)
A tradition ofbeing a tax haven, bolstered by the local presence
of many tax haven corporations, creating a virtual knockout
argument for any future government tempted to impose taxes
on forcign income. (8) Thc ease of supplying a business justifi-
cation for a Panamanian corporation should the need arise.
Of course, Panama is not perfect. As with thc no-tax havens
we dealt with earlier, it is not a good location for a holding
company holding high-tax country stock. Panama has no
double taxation agreement with any country. However, in a
multi-haven arrangement of the sort already discussed,
Panama could compete with a purc no-tax haven, even the
Caymans.
Cyprus
Cyprus is an island country in the Eastern Mediterranean, It
was forrnerly a British colony, but since 1960 it has been in-
dependent. It is a member of the United Nations, the Council
of Europe and the Commonwealth, and has established a re-
lationship with the European Community that wiJI eventually
lead to a full customs union (although not to full membership
in the Common Market) . It maintains politieally and econom-
ieally viable relations with the Arab nations, as weil as consider-
able trade with Eastcrn European countries. Its ties to Britain
and Greece are elose. The fact that the northern portion of the
island has been occupied by Turkish forces, and deelared in-
dependence as the Turkish Republic of Northern Cyprus, is
not thought unfavourable to its tax haven uses.
The majority of the Cypriot population is Greek, with a few
Turks and othcr nationalities making up a minority of the
population. The national languages are Greek and Turkish,
52 Tax Havens fOT International Business
but English is widely used, especially in the legal and business
communities. Communications are excellent, and it is a popu-
lar tourist destination.
As a result of its relationship with Great Britain, Cyprus is a
common law country with its company laws patterned after
Britain's. The costs for organising and maintaining a Cyprus
company are based on Cyprus internal costs that are quite low.
Cyprus is popular for shipping companies, and there are two
ways of using Cyprus for other companies. One is the Cyprus-
rcgistered company, which if owned by non-residents and deal-
ing only with foreign business, pays tax at 10% of the normal
corporate tax rate, which means currently an income tax of
4.25% for the company. The other method is the branch office
of a foreign company, which pays no Cyprus income tax,
The branch cannot use the Cyprus double taxation agree-
ments, although the Cyprus registered company can, because
the latter is a resident of Cyprus .
For Cyprus tax purposes, the offshore company may be a
holding company, a finance company, an investment company,
an insurance company, a management company.
Cyprus has tax treaties with the United Kingdom, Denmark,
Sweden, Ireland, Norway, Greece, the Federal Republic of
Germany, Czecho-Slovakia, Hungary, ltaly, France, Romania,
the United States, Canada, and Bulgaria.
Foreign employees of an offshore company, who are em-
ployed in Cyprus, pay Cyprus income tax at half of the normal
Cyprus tax rates.
Both the company and its employees can import duty-free
motor vehicles, office equipment, and household effects
(other than furniture).
Besides commercial shipping companies, Cyprus is popular
for registering personal yachts. A Cyprus company is formed to
own the yacht.
Malta
Malta has a tradition ofbeing fiercely Independent and neutral
over aperiod of many centuries. An island strategically located
in the western Mediterranean, it has historically been astaging
post, trading point, supply centre and a military and naval
base. Today the former British naval docks are a hub of com-
mercial ship repair and shipbuilding activity, a thriving tourist
Tax Hauens witk no Tax on Foreign Source Inco11U! 53
industry has been developcd and Malta has established itself as
a profitable manufacturing base with a presence of over 130
international companies.
Since 1989 Malta has offered a wide range of tax and financial
benefits to banks, insurance companies, insurance managers,
fund managers, trading companies, holding and personal
investment companies, pension funds, ship owners, and trusts,
An autonomous supervisory body, the Malta International
Business Authority (MIBA) has been established "to balance
the need for confidentiality with safeguards against abuse".
Malta is within easy reach of major European and Middle
Eastern business centres, and is within the European time zone
in line with Frankfurt, Milan, Paris, and Zurieh. By air Malta is
3 hours from London and Frankfurt, 2 hours from Paris and
1 hour from Rome. There are direct flights to 30 eities includ-
ing Zurieh, Brussels, Amsterdam, Athens, Cairo, and Lagos.
Malta has a typically Mediterranean climate, with mild
winters and sunny summers.
Malta is a sovereign European state with a democratie parlia-
mentary system based on the British model. It is a member of
the Commonwealth and its first self-governing constitution
dates back to 1921. There is a total absence of cultural, re-
ligious, ethnic or racial problems.
Malta's judiciary is long-established and independent. Its
laws are bascd on Roman law and the Napoleonic Code, while
more recent fiscal, company and shipping laws are based on
English statute law.
The island has had an Association Agreement with the
European Community since 1971. It has a large network of
diplomatie ties, double taxation treaties, and commercial and
investment protection agreements.
Trading companies are liable to only 5% lax. Non-trading
companies are totally exempt from income lax. Trusts pay a
small fixed annual lax in lieu of a registration fee. Trading
companies are expected to have a physieal and functional
prcsence on the island. This follows from Malta's determina-
tion to establish itsclf as a rcputable international financial and
business centre.
Non-trading companies may opt for non-disclosure of share-
holders and directors, registration being possible in the name
of local nominees. The law provides for the protection of this
54 Tax Havens fOT International Business
privacy in legal proceedings and includes special provisions to
facilitate the transfer of shares in a non-trading company after
death. Such companies need not have their accounts audited,
nor need they file an annual return or a copy of their accounts
with the government.
Non-trading companies include:
(1) Corporate and personal holding companies,
(2) Other companies which limit their activities to the own-
ership, management and administration of property of any
kind, including assets held for the purposes of a pension, prov-
ident or similar fund (other fund and financial management
operations being regarded as trading activity).
(3) Shipping companies which own and operate ships regis-
tered under any flag. The benefit of lax exemption applies
equally to a holding company and to its subsidiaries, each of
which may own one or more ships.
Malta also offers the possibility to owners ofall types ofvessels,
from pleasure yachts to oil rigs, to register their ships under the
Maltese flag. The registration and operation of Maltese ships is
regulated by a Merchant Shipping Act which is based mainly on
UK legislation. There are no restrictions as regards trading, sale
and mortgaging of Maltese-registered ships, or the nationality of
the crew.
No tax is chargeable on any dividend or interest paid by a
trading company or a non-trading company. In fact, there are
no withholding, capital gains, or any other laxes.
No exchange-control restrlctions apply to offshore companies.
They may have their accounts in any foreign currency or bank.
There is no customs duty on company property or on
expatriate employees' personal belongings imported into Malta.
For a regional office this gives Malta advantages similar to
those offered by Greece, Jordan, and Tunisia, with the key dif-
ference being that those three countries offer the privilege only
to branches of foreign corporations, while Malta offers it to a
locallyincorporated company.
No stamp, death or gift taxes are levied in relation to offshore
companies.
All rights, privileges and exemptions are guaranteed by law
for a minimum of 10 years.
Malta has double taxation treaties with all the major European
countries, the United States, Canada, Australia, and others.
Tax Hauens with no Tax on Foreign Source Income 55
There is a readily available supply of qualified professionals
in law, accounting, banking and insurance, among other fields.
Many have considerable international experience and expert-
ise. It is therefore no surprise that all major international ac-
countancy firms are representcd in the country.
The work force is highly educated, diligent and adaptable,
with standards of performance comparable to those in other
European centres, but at measurably lower costs.
The university is over 400 years old , and on a pro rata basis
there are more graduates than in many European nations.
Malta is multilingual. Business is universally conducted in
English. Italian and French are widely spoken. Maltese is of
Semitic origin and akin to Arabic though written in Roman
alphabet, Language is not a problem in Malta.
There is substantial investment in one of Europe's most
advanced telecommunications systems, A full satellite direct-
dialing systern will soon connect Malta with most parts of the
world through a 2,000 port international exchange.
Housing standards are high . Quality office spacc with all
modern facilities is available at rcasonable cost, and first dass
hotel accommodation is plentiful. For people who work 01' do
business in Malta, facilities are on a par with any European city.
Malta's cultural heritage dates back to some time before
4000 BC, and its history has provided it with a varied but solid
foundation. The Phoenicians, Carthaginians and the Romans;
the Byzantines, Arabs and the Normans; the Knights of StJohn;
the French and the British; all have played a notable part in
Malta's history, This gradual assimilation and cross-fertilisation
of cultures has created the exuberant and independent Malta
of the late twentieth century with a unique cultural identity.
The Maltese have preserved their language and special char-
acteristics for which they are weil known: their overwhelming
hospitality; a trading mentality developcd since Phoenician
times; diverse linguistic, professional and business skills; and a
willingness and deterrnination to provide quality service.
These attributes illustrate Malta's highly positive attitude
towards business and life. Furtherrnore, living and working on
the island holds many advantages: a European lifestyle at
reasonable cost; international cuisine; a superb climate; good
leisure and education facilities; a low crime rate; a histor-
ical and cultural environment. All in all, a friendly and relaxed
56 TaxHavens JOT International Business
lifestyle, yet fuHy equipped to meet the most demanding
requirements of international business.
And an individual who receives a residence permit to work
for an offshore company is not deemed to be a resident of
Malta for income tax purposes, thus paying no individual
income tax on income received from offshore companies. The
same exemption applies to their dependants.
The situation is so attractive that Malta has set up a screen-
ing process even more rigorous than ßermuda's, although this
may be a benefit rather than an obstac1e to major multi-
national corporations deciding to use Malta as a tax haven.
Jersey
The island ofJersey is located in the English Channel off the
northeast coast of France. Having an area of roughly 45 square
miles, it is the largest of the Channel Islands, and has a popu-
lation of 75,000. St Helier is the centre of the island's business
activity.
Jersey, along with the other Channel Islands, is apossession
of the English Crown, distinct however from colonial or over-
seas dependencies. The constitutional relationship between
Jersey and the United Kingdom, therefore, is unique - the
United Kingdom manages the island's external affairs, while
the island government legislates domestie matters, including
taxes and revenue.
The island has long been politically and economieally stable.
The politieal system is a conservative one; political parties do
not exist and all elected officials are independents, Issues of con-
trovcrsy or social conflict are absent, and the island enjoys much
respcctability among the international community.
Although jcrsey's economic policy over the years has
focused on improving thc lives of the island's populace, that
poliey has also made the island attractive to investors. The
standard rate of incomc tax has remaincd unchanged at 20%
62 Tax Havens for International Business
Guernsey
The second largest of the Cbannel Islands, Guernsey lies in tbe
English Channel off thc nortbwest coast of France. St Peter
Port is tbe centre of business activity on the island, which is
approximately 25 square miles in area and has a population of
57,000 .
Like the island of Jersey, Gucrnscy is apossession of the
English Crown, but it retains its own government and legal
system. Guernsey has the right to legislatc on matters of domestic
concern and taxation. Also, much like Jersey, the island enjoys
a special relationship with the Ee. It is bound by the customs
aspects of the Treaty of Rome, which essentially provides a shield
against imports, yet it retains its constitutional rights and fiscal
autonomy; for example, Guernsey retains the right to levy value
added tax.
Until the early twentieth century, French was the language
used in commercial and legal matters; howcver, English has
replaced it and now is the officiallanguage of the island. Until
recently, real cstate transactions were required to be in French,
and all legal firms maintain staff who are fluent in French.
Translations of important laws and statutes written in French
are available.
Guernsey has been stable economically and politically for
hundreds of years. It has no political parties and the members
of Guernsey's States of Deliberation, which is the island's legis-
lative branch of government, are independents. Over the years
the States has promoted policies that interfere with local enter-
prise as little as possible, resulting in a climate that is relatively
free of control. Although British currency is used in Guernsey,
66 Tax Haoens JOT International Business
Gibraltar
Gibraltar, at the tip of southern Spain, is slighdy less than 21/ 2
square miles in area. Its population numbers about 30,000 and
is composed of people of Italian, Genoese, Maltese, English,
and Spanish descent. In addition, there is a small but Import-
ant Jewish population, some Indian traders, and a significant
group of Moroccan workers.
Gibraltar has been a colony of the British Crown since 1704,
being formally ceded by Spain in 1713 in the Treaty of Utrecht.
While its official language is English, most Gibraltarians are
bilingual, speaking both English and Spanish. Gibraltar's con-
stitution gives legislative powers to the governor, who is the re-
presentative of the Queen, and the House of Assembly. Although
it enjoys a substantial amount of self-governrncnt, it is a depend-
ent territory and the formal assent ofthe governor ofthe Crown
is required for alllegislation. The governor is responsible for the
conduct of foreign affairs, security and defence. Ministers, who
must answer to the House of Assembly, manage domestic con-
cerns. The bedrock for legislation is English law, and, on to this
base, laws relating to local circumstances are built,
Although Spain lays claim to Gibraltar, the British govern-
ment ensures the political stability ofthejurisdiction. In the pre-
amble to the Gibraltar Constitution Order, Britain has pledged
that Gibraltar will remain part of the Crown unless and until an
Act of Parliament provides otherwise. Moreover, it is stated that
the Crown will never permit Gibraltar to pass under the sover-
eignty of another state without the democratically expressed
wishes of the people of Gibraltar. In February 1985 the border
between Spain and Gibraltar was reopened, and the British and
Spanish governments have agreed that there will be talks on
sovereignty. However, the British have emphasised that the
wishes of the people of Gibraltar are of greatest concern.
68 Tax HavensJOT InternationalBusiness
Gibraltar is part of the EC, having joined with the United
Kingdom under the provisions relating to dependent ter-
ritories. By concession it is excluded from the common exter-
nal tariff, the common agricultural policy and the requirement
to lcvyvalue added tax.
Gibraltar possesses the support systems needed by modern
companies. With a new telephone system having come into
operation in March 1990, the jurisdiction has excellent
telecommunications, its postal facilities are good, and it has
daily air service to Europe and the rest of the world. Its banking
facilities are likewise good, and are expected to improve as
Gibraltar continues to attract international banks. While
Gibraltar issues its own currency, money of the United Kingdom
is also considered to be legal tender.
Gibraltar is rapidly growing as an offshore eentre. Although it
is a low-eostjurisdiction, it is a re1atively high tax one. Its stand-
ard income tax rate for individuals is 30% with the tax rising to a
maximum of 50%, while its income tax rate for resident com-
panies is 35%. Still, Gibraltar offers three types of eompanies
that provide important tax advantages.
(1) The non-resident company is a eompany that is incor-
porated in Gibraltar but is centrally managed and controlled by
directors who reside outside the jurisdiction. If such a eompany
does not derive its income from within Gibraltar, it will be
outside the scope of Gibraltarian income tax. Unlike otherjuris-
dictions which charge an annual company registration tax or
non-resident company duty, Gibraltar does not apply flat rate
fees against non-resident companies.
(2) A Gibraltar company may apply for exempt status in regard
to Gibraltarian income tax. This is done after ineorporation,
and takes between 10 and 14 days, depending on the company
and the details of the applieation. Onee obtained, the eompany
reccives an Exemption Certificate that is valid for 25 years and
which grants a full exemption from income tax and estate duty
in Gibraltar. In return, the exempt company pays a flat annual
duty. Along with requiring information about the beneficial
owners, including a written reference from a professional and
a statement on the proposed activities of the company, the
authorities requirc that specific conditions be met before
excmpt status is granted:
Tax Havens with no Tax on Foreign Source Income 69
(a) The company conducts trade and business in Gibraltar
only with other exempt companies. (Exceptions are sometimes
possible with the prior consent of the loeal authorities.)
(b) There are no changes in beneficial ownership, sharehold-
ers, or objectives for which the company was formed, unless the
approval of Gibraltar authorities is obtained.
(e) The register ofmembers is maintained in Gibraltar.
(d) No Gibraltarian or resident of Gibraltar holds any
interest in any of the company's shares.
(e) The annual tax is paid in two equal instalments by 31
March and 30 September each year.
Exempt status is available both to resident eompanies, for
which the annual fee is t225, and to non-resident eompanies,
for which the fee is f200. The advantage for a resident eompany
to obtain exempt status is that it is presumed not to be resident
elsewhere.
(3) Q}talifjing companies were created in the Ineome Tax
(Amendment) Ordinanee 1983 for situations where the au-
thorities of a foreign country require proof that apercentage
of tax on profits has already been paid in Gibraltar. The tax
rates for Gibraltar are 2% for income not remitted to Gibraltar
and 17% for ineome remitted to Gibraltar. The eonditions for
obtaining a Certificate are essentially the same as for exernpt
eompanies with the following: (1) a one-time-only fee of t250
is required; (2) a minimum paid up share capital of fl ,000j
and (3) a deposit of fl ,000 must be lodged with the govern-
ment of Gibraltar as a guarantee toward future taxes.
Gibraltar is also attractive for eompany formation. A eompany
must have a minimum of two shareholders and two directors,
but the directors do not need to be shareholders. Although the
details regarding shareholders and directors are listed on the
public record, nominee services may be used to preserve the
identity ofbeneficial owners. An Annual General Meeting ofthe
shareholders must be held in Gibraltar eaeh ycar; however,
other general meetings ean be held outside Gibraltar. The
accounts of the company must be submitted to the Annual
General Meeting; however, these accounts are not filed at
the Registry and are not available to the public. While no
legal requirements exist for a company's aecounts to be
audited, an applieation for exempt status must be aecompanied
70 Tax Hauens for International Business
by a reference as to "residency" from an auditor registered
under the Gibraltar Auditors' Registration Ordinance.
A Gibraltar company must maintain its registered office in
Gibraltar, from which the company can transact business with
non-resident or similar companies. The statutory records of
the cornpany must also be maintained in Gibraltar, typically at
the Registcred Office. An Annual Return must be filed every
January.
A1though its tax rates are high compared to many offshore
havens, Gibraltar still offers several important advantages to
investors, particularly in its favourable treatment of non-
resident and tax exernpt companies.
HongKong
The British Crown Colony of Hong Kong is quite similar to
Panama in many respects. It taxes only locally generated
income, and its tax rates are extremely low by most standards.
Its haven status is subsidiary to its role as an international busi-
ness centre, stratcgically located as "the gateway to the Orient"
and as astation between the West and the vast markets of the
speedily devcloping East,
Hong Kong is in a unique situation since the British have to
hand it back to China in 1997. In thcory, Hong Kong is to con-
tinue to have a free enterprisc system for 50 years after that
date, The residents of Hong Kong obviously don't have much
belief in that, as thcy have been seeking second citizenships
and moving their holding companies to places like Bermuda.
Of course, there could be changes in China before that
which would affect the outcome.
Despite all these problems, Hong Kong is still an attractive
base for trading companies. This is particularly so if one keeps
in rnind, and folIows, the Chinese trading mentality of taking
horne the day's trading profits rather than investing in long-
terrn assets . The Chinese do think long term, but that is very
different from their trading mentality in Hong Kong.
Hong Kong also enjoys incredibly cheap labour, for it lies on
the southeast coast of Communist China, bordering on the
province of Kwangtung. The population of Hong Kong is
extrernely dense, probably the most crowded in the world; 95%
are Chinese. This population makes for an extremely competi-
tive and varied labour market, and no such checks as unions
Tax Havens with no Tax on Foreign Source Income 71
and their like are conceivable. In other words, quite apart from
tax considerations, there are very good business reasons for
setting up shop in Hong Kong.
The Crown Colony's prominence as a trade and manu-
facturing centre means that there are superb transportation
and communication facillties. Major airlines connect Hong
Kong by frequent flights to every major city in the world. Ships
are also available to anywhere, and the British civil service
tradition, coupled with the pressures of demand, makes its air-
mail, telex, and international telephone and cable services
highly efficient, regular, and reliable.
The same applies to professional services of an kinds, and
the fees for these services are kept very reasonable by vigorous
competition.
English and Chinese are the official languages, and an
official documentation is printed in both. Language presents
no difficulty at all for a westerner.
The Hong Kong economy is very free enterprise orientcd.
There are no exchange controls, and the Hong Kong dollar
circulates freely with all world currencies in a completely un-
regulated money market. The economically wide-open nature
of Hong Kong is a product of the political order. As a British
Crown Colony, it has very Iimited independence. The governor,
appointed by the Queen, nominates the two councils of govern-
ment: the Exccutive Council (cabinet) and the Legislative
Council. Unlike the Crown Colonies discussed earlier, there are
no elections here. The cabinet members and the legislators are
"opinion leaders" of the Chinese community, and are econom-
ically conservative; no socialist scheme would find signific-
ant support in the government. Even if the government were
inclined to socialism, there are solid practical reasons why it
would not go far along the collectivist road. For example, the
huge refugee population means that any form of government
welfare would immediately destroy the colony, and thus such
welfarism is inconceivable. The two councils, moreover, have
vcry lirnited power ois-d-ois the governor. He nominates an
their mernbers, and so indirectly controls them. He also has
the power to act against the majority opinions of the
Executive Council, in which case his only responsibility is to
the British Secretary of State for Foreign and Common-
wealth Affairs. He even has direct legislative powers, and
72 Tax Hauens fOT International Business
there is a long tradition of staunchly conservative governors
in Hong Kong.
The legal system is based on British common law, modified
by locallaw. The court system is British in structure.
Hang Kong has preserved the nineteenth century spirit of
free enterprise to an extent that is surprising in this day and
age. Taxes are progressive, but these taxes apply only to locally
generated income. There are no taxes on capital, gifts, or
capital gains, and death duties, which apply to assets physically
located in Hong Kong, are imposed in progressive brackets up
to a maximum of 15%. There is no tax on dividends of local
corporations. The official reason for this is that if the source of
profit is local business, then the company has already been
taxed on its profits and there is no justification for taxing the
stockholders. As for foreign source incorne, the idea of taxing
this is unthinkable. A coroJlary of the happy lack of dividend
taxes is no withholding tax on dividends. One can receive the
profits of a Hong Kong corporation, dealing outside Hong
Kong in, say, Costa Rica without any Hong Kong tax liability of
any kind .
Apart from the above taxes, government revenue in Hong
Kong derives from duties on "luxury" commodities such as
tobacco and alcohol, minor fees on imports and exports, and
stamp duties. The latter apply to transfers of shares, promissory
notes and bills of exchange, and mortgages and debentures.
Campany formation in Hong Kong follows the usual British
pattern. A memorandum and articles of association are re-
quired, and they must include the standard information. All
these requirements are purely formalities, because nominees
can be used for everything. In view of the labour situation in
Hong Kong, (US) $100 a year will cover a nominee director
who is at the same time a registered shareholder as well as a
company officer. There is no scarcity of law and trust firms to
handle all the details .
Annual maintenance of a corporation involves annual
audited accounts, signed by achartered accountant, submitted
to all shareholders, with a copy to the government. This is
required bccause of the taxation of local income; aJl corpora-
tions must be auditcd to makc certain that no such profits are
concealed. A local representative can take care of the audit,
Tax Havens witk no Tax on Foreign SOUTce Inco'TTUJ 73
keep the company seal, display the company name on a sign in
his office, and do whatever else is necessary.
The government charges are vcry low. Thc initial expenses
of incorporation, articles of association, and stock certificates,
and the various uses of nominees can total as little as (US)
$500. Annual maintenance can be as low as $500. Bargains, to
say the least.
Incorporation takes up to foul' weeks to accomplish. It can be
done with complete privacy through nominee shareholders, for
there is no legal requirement that ultimate beneficiary owners
be disclosed.
Just as Panama came out with flying colours as compared
with even the Caymans, so Hong Kong, in certain ways, scores
compared with Panama. There is business justification un-
limited, at lower local tax and corporation costs and with
similar privacy. On the other hand, the exclusion of bearer
shares, the need for annual auditing, and the short time left
until Chinese control in 1997 are negative factors.
7 Tax Havens für Special
Purposes
74
Tax Havens for Special Purposes 75
ised, highly taxed countries. However, some agreements are of
very considerahle interest. With these thoughts in mind, we
will consider first The Netherlands and Austria. Although
Luxembourg has an extensive network of double taxation
agreements, they do not apply to its tax haven companies.
The Netherlands
Holland, originally referring only to the two western provinces
of North and South Holland which lay between the Rhine and
the Zuider Zee, is now in general use as the popular name for
the Kingdom of The Netherlands, and the two are used inter-
changeably. The people are known as Dutch. This small spit of
land, no more than a pinpoint on the globe, lies to the east of
England across the North Sea, and is bounded by Germany to
the east and southeast and by Belgium to the south . The land is
very low, and at one time in history was in fact known as The
Low Countries. Half of the land itself is below sea level. It lies
across the mouth of the Rhine and is criss-crossed by two large
European rivers, the Meuse and Scheldt, and by its famous
canals, giving it the nickname of ''Venice of the North ", The
picture painted indelibly on almost everyone's mind ofHolland
as the land of windmills will soon be just that - an imagined
scenery - for although there are still colourful windmills whose
arms flash against the sky, most water-pumping work is now
done by modern stations using electric power. The hazards of
the sea, factualised and fictionalised, have made Holland the
land of storied seafarers, barge men, and builders of dikes.
Indeed, it is water that made Holland the gateway to Europe,
providing the main source of the country's present wealth, and
the cause, through directing the warm Gulf Stream along her
coasts, of the country's mild climate.
The Kingdom of the Netherlands is a constitutional mon-
archy with democratic parliamentary government. By this
means, the monarch, government, and parliament together
rule the country. The kingdom includes the Netherlands
AntilIes which has its own tax laws and is not included in this
discussion.
The Netherlands is a highly industrialised nation with little
reliance on agricultural products to holster its GNP. There is
some oil production, but of greater importance recently has
been the discovery of natural gas.
76 lax HavensJOT' International Business
The Dutch economic system might best be described as a
social weJfarc system similar to that of Great ßritain, without
being beset, at present at least, by the industrial problems
afflicting Brltain. The Netherlands, regardless of its own inter-
nal tax structure which compares to that of other heavily taxed
nations, has nevertheJess established itself as a tax haven
through legislative action allowing substantial tax benefits to
companies formed in The Netherlands for specific business
purposes. The Dutch political system is a cumbersome affair
and changes within the system are difficult or impossible to
achieve. Executives of a tax haven company should be weil
advised in advance to so design the operation that it falls
within the structure outlines of Holland's tax haven legislation
and avoids most internal tax liability,
Tax cxemptions are provided within The Netherlands on
specific qualifying activities, and there are treaties maintained
by the government to avoid double taxation.
Generally, the tax treaties will accomplish three reductions:
(1) Reduce the normal Netherlands withholding tax rate of
25% on dividends paid to recipients in the other country to a
lesser rate, i.e., 15% (except in the cases of Czecho-Slovakia,
Hungary, IreJand, Israel, Italy, Surinam, and Thailand, where
the rates may be either more or less than 15%), with an addi-
tional provision that if the company receiving the dividend has
a minimum capital participation - or in some cases, voting
stock - of 25% in the dividend-paying company (with the exclu-
sion of Canada and Italy and with an increase to 50% in the
case of Spain), the withholding tax rate will be reduced even
more. In respcct to the United States and the United Kingdom,
if the recipient company holds 25% of the stock in The Nether-
lands company, the withholding rate is reduced to 5%.
(2) Reduce the withholding tax on interest which a
Netherlands-based finance subsidiary of a foreign corporation
reccives. The withholding rate in the case ofthe United Kingdom
which would normally be 35% of the gross, is reduced to 0% of
the gross, with the net intcrest income being subject to normal
Netherlands corporate tax rate. The US company, which would
normally pay a withholding tax of 30% of the gross, has the tax
reduced to 0% of the gross, with the nct interest income being
subject to the usual Netherlands corporate tax rate.
Tax Haoensfor Special Purposes 77
(3) Reduce the withholding lax rate on foreign source divi-
dends received by The Netherlands participating company,
with an added provision that if the Netherlands company par-
ticipates in the paying company's capital (or in some cases,
votingstock) to the extent of 25% (or 75% in the case of a com-
pany resident in Italy, and 50% in the case of a company
resident in Spain), there will be a further withholding lax rate
deduction. Dividends received from the United Kingdom are
not affected by these provisions, since the United Kingdom
does not have a withholding lax on dividends paid. In regards
to the United States, the normal 30% withholding rate will be
reduced to 15% through the treaty, with an added provision
that if the Netherlands company participates in the dividend-
paying company to the extent of 25%, the withholding rate will
be reduced to 5%. All %age figures apply to gross amounts.
There are three types of foreign companies which can be
benefited by the Netherlands lax haven legislation. These are
the finance subsidiary, the holding company, and the partici-
pating company.
Subsidiary
Pro Contra
• LiabiJity of shareholders is • More expensive,complicated
limited to the extent of their and tlme-consurning
capital contribution
• Unless agreed otherwise by • Withholding tax on remitted
contract, the foreign parent earnings (usually 5% on
company is not responsible for dividends)
debts, obligations and liabiJities
of the Dutch subsidiary
• Dutch nationals often prefer • Publications of financial
dealing with a Dutch subsidiary statements in full is mandatory
as opposed to a foreign branch for a medium-slzed or large
office company
• If no remittance of profits • Uability to various Dutch
to the parent is necessary, taxes mayarise when the
further taxation can be company Iiquidates and the
deferred by reinvesting shareholders have not acted in
subsidiary's earnings good faith
• Intangible assets can be • A capital tax of 1% is
amortised for Dutch tax payable on the (valueof)
purposes capital contributions
cont. (JrJerleaj
84 Tax Havens JOT International Business
Table 7.1 FstabUshlng a company in the Netherlands (subsidiary
versus branch)(continued)
Branch
Pro Contra
• Relatively easy to set up and • Operates as a foreign company
costs are generally lower and has no Dutch identity;
acceptance by Dutch nationals
• No withholding tax on may be affected
remitted carnings
• Foreign parent company is
• No requirement to publish the fully responsible for debts,
financial result of the branch obligations and liabilities of
(except foreign insurance the Dutch branch
companies and banks)
AustraJia 15 10 10
Austria 10 0 0/10
Belgium 5 0/10** 0
Canada 10 0/15 0/10
China 10 0/10 10
Denmark 0 0 0
Finland 0 0 0
France 5 0/10/12 0
Germany 25** 0 0
Greece 5 8/10 5/7
Hungary 5 0 0
Indonesia 10 10/20 5/10/20
Ireland 0 0 0
Israel 15 10/15 5/10
ltaly 0 0/20/30 0
Japan 10 0/10 10
Luxembourg 2-1/2/0 0 0
Malta 5 10 0/10
Morocco 10 10/25 10
Netherlands AntilIes 7-1/2/5 0 0
New Zealand 15 0/10 0/10
Norway 0 0 0
Pakistan 10 10/15/20 15/5
Poland 0 0 10
Romania 10 10/0 0/10
Russia 15 0 0
Singapore 0 10 0
South Africa 5 10 0
South Korea 10 0/10/15 0/5
Spain 10/5 10/15 6
Sri Lanka 10 10/0 10
Surinam 15/7-1/2 5/10 5/10
cont. ouerleaf
86 Tax HavensJOT International Business
Swedcn o o o
Switzerland o 0/5 o
Thailand 10/15/20 10/25 5/15
Turkey 15 0/10/15 10
United Kingdom 5 o o
United States 5 o o
Zambia 0/10 10 10
• Provided the Dutch comp:my holds at least 15% ofthe shares ofthe distributing
company. Sometimes additional requirernents apply regarding the ownership of
shares.
•• Provided the Durch company holds less than 25% of the Belgian company.
••• 15%. if the Durch company owns less than 25% of the shares in the German com-
pany.
7 2
6 2 4
5 4 6
4 6 8
3 8 10
2 10 or over,
92 Tax Haoens JOT International Business
therefore of minor importance and very low in comparison
with surrounding countries.
Value added tax Value added tax (VAT) is levied in The Nether-
lands on entrepreneurs on the delivery of all goods (both mov-
able and immovable) and services rendcred in Thc Netherlands
and, generally, on the importation of goods. Thc term "delivery"
98 TaxHavens JOT International Business
includes the transfer of title goods, lease/purchase agreements
and the disposal of goods for non-business purposes.
VAT is levied at each stage ofproduction and distribution on
the basis of amounts invoiced to the purchaser, including ship-
ping, handling and insurance charges but excluding the VAT
tax itself and cash discounts for prompt payrnent or deposits
on returnable containers. For imported goods, the taxable
basis is the import value as determined for customs duty pur-
poses, together with all import duties and inland freight. The
delivery of goods is deemed to be a taxable event if the place
where transportation begins or where the goods are located at
the time of delivery is within The Netherlands. Services are
normally considered to be supplied where the supplier of the
services is established or has a fixed establishment. However,
numerous exceptions exist for specific services.
The following tax rates are currently in force:
(a) A standard rate of 18 1/2% applicable to all goods and ser-
vices not exempt or subject to the reduced rate or zero rate.
(b) A reduced rate of 6% for those goods and services con-
sidered essential (i.e., necessaries oflife) .
(c) A zero rate for goods rclated to export and import (e.g.,
any activities within bonded warehouses or their equivalent).
VAT is charged to the customer and must be stated on the
invoice for all goods and services supplied. VAT is paid to the
tax authorities through a tax return that must be filed on a
monthly or quarterly basis as decided by the local tax inspector.
The return and related payment are sent to the tax collector
within one month after the end of the applicable period.
VAT is paid to suppliers on purchased goods and services
(input tax), and is deductible from the VAT charged to custom-
ers (output tax). Both amounts must be stated on the tax return.
If the VAT paid exceeds the VAT charged, the excess is
refunded by the tax authorities. The right to deduct VAT paid
from VAT charged arises when the invoice is received and not
when it is paid. Conversely, VAT charged is payable to the tax
collector at the time when the invoice is rendered to the cus-
tomer and not at the time when payment, is received.
Although The Netherlands should not be considered as a tax
haven country in any general sense, it does offer considerable
advantages to holding and finance companies. In appropriate
circumstances, formation of a Dutch company might be the cor-
Tax Havens Jor Special Purposes 99
reet choice as a vehicle to finance other companies in a group,
while it may at the same time function as a holding company.
Austria
Austria has holding company legislation that is in many ways
similar to that of The Netherlands for receipt of dividends
from subsidiaries. Austria is a neutral country with strong trade
ties to Eastern Europe, which may be useful for a holding com-
pany making investments in that area. It is not a member of
the European Community, and thus is outside the common tax
policy, but that could change in the future as Austria is consid-
ering membership.
Austria has an extensive system of double taxation agree-
ments, too, covering nearly 40 countries. In the 1989 tax reform
in Austria normal corporate taxation was reduccd to 30%.
A corporation is subject to Austrian tax on its carnings
world-wide if the head office or registered office of the com-
pany is in Austria. The head office is assumed to be where the
centre of senior management is situated. The registered office
is the place defined by law, where an Austrian corporation is
headquartered.
Corporations that have neither their head office nor their
registered office in Austria are subject to tax in Austria on their
domestic earnings.
If a corporation (parent company) has a holding in another
Austrian company (affiliated company) all of the parent com-
pany's profit-sharlng is tax exempt. This tax exemption applies
both to disclosed dividend payouts and to disguised profit
distribution.
Apart from the general exemption for holding earnings in
Austria, there is also what is known as the "international inter-
company tax concession", An Austrian corporation is exempted
from paying Austrian corporation lax on any form of profit-
sharing from a holding in a foreign corporation provided the
following conditions are met: the foreign corporation must be a
corporation (not a partnership or other form of enterprise);
and the Austrian corporation can show evidence to have directly
possessed a holding interest of at least 25% in the shares of the
foreign corporation continuously for at least one year before the
balance sheet date applicable to the income assessment.
100 Tax Hauens JOT International Business
An Austrian holding company may thus collect dividends
from its foreign subsidiaries tax free. The "international inter-
company tax concession" covers both disclosed dividend pay-
outs and disguised profit distribution.
The "international intercompany tax concession" does not
contain an "activity clause". It is thus of no consequence whether
or not the Austrian holding company or its subsidiary have
active earnings - in other words, whether or not they are
actively engaged in business transactions.
Once the requirements for the "international intercompany
tax concession" have been met, not only the regular dividends
but the capital gains generated in Austria which arise from the
sale of such qualified affiliated holdings are tax exempt. Tax
exemption for capital gains applies only to holdings in foreign
companies, however. The capital gains arising from holdings in
Austrian corporations are entirely subject to taxation.
There are no provisions stipulating that mere holding compa-
nies are excluded from the privileges provided for in Austria's
double taxation agreements. On the other hand, Luxembourg's
double taxation agreements contain such provisions.
If an Austrian corporation pays dividends to a foreign corpor-
ation a withholding lax of 25% is withheld (some double tax-
ation agreements provide for lower rates of withholding lax).
This raises obvious problems in paying the money from Austria
to a pure tax haven . Of course the problem only arises if and
when there is a need to pay out a dividend, rather than reinvest
the money.
The conversion of interest into dividends and vice versa often
makcs sense for taxation purposes. For exarnple, if a Swiss com-
pany purehases bonds, any intercst thercfrom is fully liable to
taxation in Switzcrland. If thc Swiss company instcad cstablishcs
a subsidiary in Thc Notherlands Antillcs and the subsidiary
earns intcrest thercon which is taxable in the Netherlands
Antilles at a maximum level of 3%, the subsidiary subscquently
pays the Swiss parent company dividends, which are not subject
to withholding tax in the Nethcrlands AntilIes. In Switzerland
the dividends received are lax exempt. In this case the interest
was converted into dividends in the Netherlands AntilIes.
Converting interest into dividends and vice versa is generally
possible in Austria (provided no fake transaction or breach of
the law is involvcd) and may weil payoff.
Tax Havens fOT Special Purposes 101
For example, a Saudi Arabian company wishes to invest in a
Dutch company. As Saudi Arabia has not concluded any double
taxation agreements, dividend payments from The Nether-
lands to Saudi Arabia are subject to a withholding tax of 25%.
On the other hand, the Saudi Arabian company may establish
an intermediate holding company in Austria which in its turn
acquires a holding in the Dutch company. By terms of the
Austrian-Dutch double taxation agreement, dividends can be
transferred tax-exempt from The Netherlands to Austria. In
Austria neither these dividends nor any capital gains arising
out of the sale of the holding are subject to tax.
However, the tax-exempt transfer of the dividcnds to Saudi
Arabia is not possible, since Austria has not concluded a double
taxation agreement with that country. But it is possible to con-
vert dividends into interest. The Saudi Arabian company first
establishes a second subsidiary (sister company ofthe Austrian
holding company) in a country which levies cither no tax or
only low levels of tax on interest and no withholding tax on
dividends (e.g., an offshore company in the Channel Islands 01'
the Netherlands Antilles).
The Saudi Arabian company provides this offshore company
with the appropriate equity capital. The offshore company
passes on this equity capital as a loan to the Austrian holding
company. The latter acquires the Dutch companywith the loan
from the offshore company. Dividends and capital gains frorn
the holding in The Netherlands are temporarily invested in
Austria tax-exempt. The profits temporarily invested in Austria
are transferred out of Austria in the form of interest payments
on the loan from thc offshore company. This flow of profits is
exempt from tax, because such interest payments are not sub-
jcct to tax in Austria. The offshore company, too, receivcs the
interest tax-exempt. The interest is again convertcd into divi-
dends and is transferred exempt of withholding tax to Saudi
Arabia.
In the above example the withholding tax is lowered from
25% to 0%. It should be noted, however, that arrangements Iike
this need to be examined very closcly to ensure that they are not
classified unilaterally as fake transactions 01' abusive practices.
By contrast with most countries' lax law systems, Austria's
commercial and tax laws do not prescribe minimum debt/
equity ratios.
102 Tax Havens JOT International Business
Luxembourg
Luxembourg is a full member of the Economic Community.
Most Luxembourg taxes are the same as in its neighbouring
countries, Belgium, France, and Germany. However, Luxem-
bourg is especially well-suited as a tax haven for specific
purposes.
The Holding Company Act of 1929 makes Luxembourg an
attractive tax haven for the holding company, provided it
meets prescribed qualifications: It must be a "pure" holding
company; it cannot conduct "actual business"; and it cannot be
a "commercial establishment open to the public". The "no
actual business" clause is interpreted to mean no industrial
activity. In effect, this mcans that there are many business activ-
ities in which the pure holding company can participate. Sev-
eral thousand holding companies are presently located in
Luxembourg, with the number constantly increasing.
For the purpose of tax havenry, it is important to make the
distinction between the mixed holding company and the pure
holding company.
(1) Mixed holding company. The mixed holding company is
defined in Luxembourg as one that administers an investment
portfolio, takes participating interests, develops patents, and
also engages in direct industrial and/or commercial activity.
The Holding Company Act of 1929, and the lax advantages
that it provides, does not apply to the mixed holding company.
(2) Pure holding company. In Luxembourg, the pure holding
company is defined as one whose "sole object is the taking of
participating interests, in whatever form, in other Luxembourg
or foreign undertakings, and the administrating and develop-
ment of such participating interest, so however that company
shall carry on no industrial activity, nor maintain a commercial
establishment open to the public", The Holding Company Act
of 1929 applies specificaHy to this type of holding company.
The pure holding company may only hold negotiable secur-
ities as assets. This is not as restrictive as it may first appear. It
does not mean that the company must be an inactive body with
a fixed portfolio; it can, for example, seil a portion of its secur-
ities to dispose of some participations, and can, in turn rcinvest
the proceeds of the sale by taking participating interests in
another enterprise. Again, the distinction is that the company
has not engaged in any industrial activity, nor attempted to do
Tax Havensfor Special Purposes 103
business with the public. Further, the pure holding company is
permitted to develop its interests by supervising the financial
administrations of its affiliates, even to the extent of exercising
technical and commercial control.
Moreover, it is expected that the pure holding company will
take an active interest, either as a shareholder or as a lender, in
its affiliate firms. Thus, the legal interpretation of the c1ause
"administration and development of such participating inter-
ests" is that the holding company can grant long-term and
short-term loans to the various enterprises in which it takes a
participating interest, as weIl as guarantee increases in their
capital. However, such loans must be terminated if and when
the holding company withdraws from participating in the
enterprise. Also construed as loans for the purpose of this pro-
vision are any advances that a holding company might make to
an enterprise, the securities of which do not make up a suffi-
cient %age of the holding company's portfolio. (This is not
applicable, however, to finance holding companies that were
formed in accordance with regulations that the Minister of
Treasury issued on September 9, 1965.)
Although the holding company may hold participating
interests in other undertakings, "in whatsoever form", Luxem-
bourg legislation does not permit holding company associ-
ation with a partnership firm, or permit a holding company to
be a partner in a firm .
The one exception to this is a holding company acting as a
"sleeping partner" in a partnership limited by shares.
The intent of the 1929 legislation is that the holding com-
pany cannot own real estate, with the rare exception in which
real estate is necessary to accommodate the company's adminis-
trative departments. However, its portfolio may contain shares
of areal estate company.
Philippines
In an effort to bolster the local economy, the Philippines has
enacted legislation that incorporates certain restrictions and
provisions which may ultimately make the Philippines of little
value as a tax haven. The body of the legislation is Decree 218,
"Prescribing Incentives for the Establishment of Regional
or Area Hcadquarters of Multinational Companies in the
Philippines". Companies that qualify for tax benefits under
this decree usually establish regional offices in the Manila area.
The essence of Decree 218 is that any regional headquarters
organised in the Philippines that is managed and controlled
from outside the country, and that does not derive local income,
may be entitled to a 100% tax exemption. The intent of the law
is to make the regional office act only in a supervisory,commun-
ications or coordinating capacity for other affiliates or branches
in the Asia-Pacific area. This means that the parent company
must be extremely careful to segregate and limit the functions of
the regional office. Some provisions of the decree are:
(1) Either a Philippine commercial attache or a Philippine
consul in the horne country of the multinational firm must
present certification to the Philippines government that the
foreign firm is a legal entity engaged in international trade
with affiliates, subsidiaries, or regional offices in the Asia-
Pacific area.
(2) A principal officer of the multinational firm must
present a certification to the Philippines government stating
117
118 Tax Haoens for International Business
that the multinational firm has been authorised by its board of
directors to establish regional offices in the Philippines. This
certification must state that the regional office will act only in a
supervisory, coordinating, or communications capacity for its
affiliates, subsidiaries, and branches in the Asia-Pacific area;
and further, that no income will be derived in the Philippines.
(3) The multinational firm must agree to spend at least US
$50,000 (or equivalent) annually, to cover the expenses of its
operation in the Philippines. Within 30 days of receiving the
Certificate of Registration from the Securities and Exchange
Commission, the company must present to the Securities and
Exchange Commission a certificate of inward remittance from
a local bank of at least US $30,000 (or equivalent). Thereafter,
within 30 days of the anniversary date of the establishment of
the regional office, the company must present to the Securities
and Exchange Commission a certificate of inward remittance
of at least US $50,000 or equivalent. The currency used must
be converted to Philippine currency.
Furthermore, the Philippine office will be permitted to
operate only at the discretion of the Bureau of Internal Revenue
that judges on such matters as the source of income, and func-
tions of the branch office.
If the regional office meets the qualifications, it receives the
following tax exemptions:
(1) It is cxempt from Section 191-3% tax on gross receipts
of contractors, proprietors or operations of dockyards and
other activities.
(2) It has 100% excmption from an income tax in the
Philippines.
(3) It is exempt from an licences, fees,local taxes, etc.
(4) Its executive personnel qualify for areduction of the
normal withholding tax that is applicable to their wages. The
normal tax is 30%, which is reduced to 15%.
(5) There are no import duties on equipment necessary to
maintain the local office, or on household items of foreign
personne1 who manage the office. Furthermore, normal im-
migration requirements are relaxed so that foreign personnel
may have free movement into the Philippines.
The normal corporate tax rate of the Philippines is 35% on
taxable income, with forcign branches and resident corpora-
tions paying an additional 20% on profits remitted abroad. The
Special LegislatumJor Regional OJfices 119
income lax rate on Philippine individuals is graduated on a pro-
gressive seale, beginning at 3% and going to 70%, with fixed
amount exemptions for single persons and dependent children,
as weIl as a standard 10% deduetion. Corresponding amounts in
US dollar equivalencies are somewhat lower than in the Uni ted
States, reflecting the lower per capita ineome of the Philippines.
Jordan
jordan, a small Arab nation strategieally loeated near the Red
Sea, Mediterranean Sea, and the Arab markets of the Middle
East, is making a bid, through special lax haven legislation, to
induce international business firms to loeate regional head-
quarters there. Now that Beirut is no longer available as a
regional headquarters for international trading companies,
jordan may weIl achieve the status of a major tax haven and
regional headquarters loeation for trade in the Middle East.
The jordan law is caIled the Foreign Companics Registration
Law. Under the law, a foreign company ean establish ajordan-
based branch for engaging in business outside jordan. The fact
that thc law does not permit the foreign company to conduct
business in jordan should present no obstacle to thc enterpris-
ing firm that can use sueh a strategie loeation to reaeh Arabian
Gulf markets.
As apart of the oil-producing Arabian region, jordan's
physieal location provides aecess to the Persian Gulf, the
Mediterranean trade routes used by oil-producing companies,
as weIl as to the Red Sea and the Indian Oeean routes that serve
Asia, Africa, and Australia. It also has excellent highwaysand air
services to link it to Europe and neighbouring eountries. Its
loeation gives access to a consumer population eomparable to
that of the United States, with a combined national product of
approximately $150 billion.
jordan's business community seems to have a stronger base
in the principles of free enterprise than other countries in the
region. Combined with a history of economie stability, high
educational standards, a high literaey rate, and excellent living
conditions, the jordanian penchant for free enterprise should
provide the elements for important economic growth.
Because of its importance in the industrial and commercial
world, Jordan officials have made English a mandatory sub-
ject in government schools. Eight years of English-Ianguage
120 TaxHavens for International Business
instruction is required for all secondary and vocational school
graduates. Moreover, the jordanian business and professional
community (including government offices) is staffed with
English-speaking jordanians, many of whom are graduates of
American or British colleges and universities.
Banking facilities are good, with a large network of commer-
cial banks - including several foreign banks - and many special-
ised credit institutions to provide short- and long-terrn money
for qualified business firms.
A1though not much can be said for the efficiency ofjordan's
seaports, which seem to be continually clogged with ships, the
excellent network of highways in the area provides a viable
transportation system. Also, jordan's air service from many
major airlines piaces it within a few hours of European and
Arab capitals. The only executive jet service in the Middle East
is located in jordan.
jordan maintains a dependablemail service, with air mail
from the United States arriving in four or five days. A direct-
dial telex system is connected with the major international car-
riers. The direct-dial system for telephone calls to the United
States and Europe is constantly being improved - new satellite
telephone equipment has been installed. jordan gives priority
to any foreign company that requests telex services.
Amman, the capital, has international schools for elernen-
tary and post-elementary students, Hospitals and other medi-
cal facilities are modern. Churches are of many denominations
because jordan has a large Christian population. Local shops
and supermarkets are stocked with familiar American and
European household items and products. Shopping or dining
out is easy, with storekeepers and other businessmen speaking
English. There are French, Chinese, Polynesian, and Turkish
restaurants in addition to the more familiar American and
Arabian ones.
Amman also offers cultural events found in any major city -
concerts, art exhibits, lectures, and films. The entire country is
somewhat like an open museum because Greeks, Romans,
Nabateans, Canaanites, Persians, Crusaders, Arabs, and Ottoman
Turks have, at various times throughout history, held or da-
minated some or all of jordan. jordan differs from most Arab
countries in that it engages in and provides equipment for a
variety of sports activities, including tennis, basketball, soccer,
Special Legislaiion for Regional Offices 121
horseback riding, hunting, horse racing, squash, cricket, fishing,
sailing, water skiing and scuba diving.
Amman provides de luxe housing at rates below the average
for the area. Housing consists of single dwellings with attractive
gardens. A variety of modern apartments are also available.
Foreigners may be pleasantly surprised to find that household
servants work at modest wages.
A company registering under jordan's Foreign Companies
Registration Law will find itself in line for many tax benefits,
including: total excmption from income and social security
taxes; exemption from registrations with the Chamber of Com-
merce, and from the paymen t of business registration taxes;
exemption from customs dutics on the furnishings and equip-
ment for thejordan branch office; and exemption from duties
on the importation of commercial sampies. jordan also grants
non-resident exchange control status to the regional office so
that it may maintain bank accounts in foreign currency.
Not only does the jordan-based regional office receive direct
tax benefits, its employees also receive substantial privileges
from the Jordan governmcnt. These include exemption from
social security and incomc taxes for non:Jordanian employees;
an cxemption on customs duties on houschold furniture
importcd by the non:Jordanian employees; duty-free Import-
ation of a car every two ycars, granted to each employee; and
the availability of residential and work permits for the non-
jordanian employees,
It seems likely thatjordan's bid to attract international bus-
iness will be successful. Some years ago Greece offered a similar
package of tax bencfits and experienced an influx of regional
headquarters of multinational companies. jordan's tax exemp-
tion law for foreign companies, together with the many other
concessions and incentives that are offered, should create a
healthy international business scene in the Arab kingdom.
Greece
Greece consists of the mainland, a few large islands, and many
smaller islands. The mainland is bordered on the north by
countries of southeastern Europe, and on the south by the
Mediterranean Sea. A major portion of its external bound-
aries comprise the shorelincs of thc Ionian, Aegean, and
Mediterrancan Seas. The largcst of the islands is Crete, lying
122 Tax Havens fOT International Business
southeast of the mainland in the Mediterranean. The capital
city of Grcece is Athens.
Greece's tax haven laws, especially as they affect foreign
firms with shipping interests, have been responsible for the
sound economic growth of the nation. Apart from the tax
haven industry, there has been a gradual but decided tran-
sition from an agriculturally-based economy to one that is
divided bctween industry and services. And, as has been the
case for many centuries, shipping plays an extremely Import-
ant role in Grecce's economic development. The gross
national output is making steady annual increases.
A majority of the general populace speaks the Greek lan-
guagc; however, many pcrsons in thc business community have
a working familiarity with English.
Except for the specially designed tax havcn laws, wh ich
exempt qualificd regional headquarters of multinational co m-
panies from tax, taxation in Greece is a reality of life (the
corporate tax rate is in the neighbourhood of 40%, and inher-
itance tax rates are on a progressive scale that reaches 75%.
Tax evasion in Greece is a risky venturc.)
In addition to extremely well-developed facilities for ship-
ping, Greece has a well-deve1oped banking system, inc1uding a
ccntral bank, sevcral commercial banks, investment banks,
credit institutions, and branch offices of foreign banks. Many
major airlines servc Greece. The country has a good cornmuni-
cations system, as weil as an efficiently operated postal service.
The national currency is the drachma.
Any foreign commercial or industrial company that estab-
lishcs a regional office in Greece, under Law 89, will receivc
100% excmption from income tax, as weil as other significant
tax benefits. Thc titlc of this Greek tax law in its entirety
is "Establishment in Greece of Foreign Commercial and
Industrial Companies",
Thc establishment of a Greck regional office is subject to the
approval of the Minister of Coordination, who approves or dis-
approves thc application within several days. Approval is con-
tingent upon granting power of attorney to a permanent
Greck resident who will act as thc foreign company's legal
rcprcscntativc. Thc law requires that a Greek consular officer
in the horne country of the foreign company authenticatc
Special LegislationJor Regional Offices 123
tbe power of attorney wbicb must be translated into tbe Greek
language.
To effect tbe power of attorney, a statement must be written
in tbe borne country, stating that tbe party gi'ving the power of
attorney is a duly constituted corporation. Tbis statement must
be notarised bya local notary public. Tbe foreign parent com-
pany mayaiso be asked by the Minister of Coordination to file
a copy of tbe annual balance sbeet and profit and loss state-
ment (your local attorney mayaiso suggest sending a copy of
tbe parent company's articles of incorporation).
Tbousands of foreign companies that operate sbipping
fleets bave establisbed Greek regional offices to take advantage
of the tax benefits on non-Greek source income from around
tbe world.
Provided that the regional office is legally structured in ac-
cordance witb Law 89, and provided that it derives no income
from Greece, it receives the following benefits:
(1) Exemption from all Greek taxes.
(2) Exemption from income tax on earnings of foreign
personnel who work for the regional office.
(3) Exemption from all customs duties, stamp duties, im-
port taxes, and luxury taxes on items imported to equip the
regional office.
(4) Exemption from duties on the importation of house-
hold items by the firm's foreign personnel.
(5) Exemption from any requirement to keep books in the
Greek language.
(6) Exemption from requesting the approval of the Post
Office to post registercd letters abroad.
(7) Exemption from any export-import duties relating to
sampies of advertising material by the regional firm.
(8) Exemption from tax on interest received from deposits
in Greek banks or from government bonds.
(9) Exemption, for certain specified enterprises, from a tax
on the profits from sale ofsecurities.
(10) Exemption from any tax on interest from loans
granted by foreign banks or firms to certain Greek entities,
regardless of whether or not Greece has a double taxation
treaty with the horne country of the foreign firm granting the
loan.
124 Tax Hauens JOT International Business
Tunisia
In 1989, Tunisia passed legislation authorising a package of tax
exemptions for international service companies, following the
same basic pattern as the Creek andJordanian legislation. The
one major difference is that approval can be obtained to do
some local business, which is taxed at the normal local rates. It
is too early to tell how weil Tunisia witt devclop as a regional
headquarters site. The climate is lovely, and it is an attractive
tourist destination, but it does not have the advantages of
Jordan as being in the centre of a booming market. However,
as developmcnt programmes continue in the western North
African countries, Tunisia may become an interesting base.
Puerto Rico
Puerto Rico is a US-controlled tax haven in the enviable posi-
tion of enjoying the advantages that an alIiance with the
Uni ted States can bring, but with an internal tax system that is
separate and distinct from that of the Uni ted States. There-
fore, Puerto Rico has traditionally been able to offer substan-
tial lax haven bcnefits to corporations. As a result of the
Industrial Incentivcs Act, and various amendments, Puerto
Rico has become weil known for the tax holidays granted to
manufacturing and hotel investment firms. Of course, many
countries offer such tax holidays for new enterprises, hut that
is not within the scope of this book. Certain locally-hased
service corporations also can qualify under these incentive
acts, usually receiving a 50% tax holiday for aperiod ofyears.
For a regional headquarters, an inadvertent result of the
unique political status of Puerto Rico has made it a popular
Special Legislation lor Regional Offices 125
base for regional offices covering Latin America, and many
large American corporations use Puerto Rico for this purpose.
Puerto Rico is not apart of the United States for income tax
purposes; therefore, for income lax purposes, it considers US
source income as foreign source income. A unique tax advan-
tage becomes obvious. Puerto Rico does not lax foreign source
income of a foreign company that has a branch in Puerto Rico.
From this, we can readily see the lax saving potential of a lax
haven corporation, formed in a jurisdiction such as Panama or
the Cayman Islands, with a branch office registered under
Puerto Rican corporate law. The Puerto Rican branch could be
used for the company's international business, and only the
income actually earned in Puerto Rico would be subject to
Puerto Rican taxation.
One large American manufacturer of air conditioners has
used Puerto Rico in this way for many years. The Latin
American sales subsidiary is incorporated in Panama, but act-
ually operates from an office in San Juan, the capital of Puerto
Rico. The sales representatives cover all ofLatin America from
the SanJuan base, and the profits are entirely tax-free,
Puerto Rico's access to the Latin American consumer rnar-
ket, together with its unique lax advantages, place the cor-
porate office in a more enviable regional position than would
be the case in Miami or other mainland headquarters. SanJuan
has become a major air transportation hub for the region,
making travel between a San Juan base and both North and
South America extremely easy. It is about 2112 hours flying time
to Miami, and 3,1/2 hours to New York.
Mail-order companies, publishers, consultants, service firms,
and many others who are looking to explore the Latin
American market, should find a Puerto Rican-based enterprise
to be profitable.
The Puerto Rican trade zones offer another business poss-
ibility. These trade zones, which are outside US customs ter-
ritory, rent such facilities as warehouse and assernbly space.
These are important assets for a company working into the
Latin American market. Together with the export manufactur-
ing exemption, available for ten years to a loeal manufactur-
ing company, . this provides a tax-free and duty-free base of
operations within the jurisdiction of the United States. There
126 TaxHavens fOT International Business
is no other place in the territorial limits of the Uni ted States
that provides such an advantageous base for the exporter.
Except for its ineome lax status, Puerto Rieo is as mueh a
part of the United States as is any state. This means that it is
within the customs territory of the United States, allowing
equipment, supplies and goods to be transferred from the
mainland without duties. Sinee Puerto Rieo is part of the
United States, US immigration laws apply to posting foreign
personnel there, although for an American citizen a trip is no
more restrieted than a trip from one state to another.
Another extremely important consideration is that Puerto
Rieo is included in the US postal system, with domestic postage
rates applieable to mail between the United States and Puerto
Rico.
Benefits from government aid programmes such as employ-
ment training or loans from the Economic Developrnent
Administration and Small Business Administration that are
available to US business, are equally available to Puerto Rican
enterprises. Thus a Puerto Rican subsidiary or branch can
apply for the various forms of assistance available under these
fcderal government programmes.
9 Switzerland - not all that
it is Alleged to be
127
128 Tax Havens fOT International Business
Switzerland was among the founding members of the
European Free Trade Association (EFTA). In 197~ it signed an
agreement with the European Community for the establish-
ment of a free -trade zone for industrial products.
Switzerland has a well-devc1oped system of banking that is
responsible for a large portion of foreign assets and liabilities.
By the nature of most business conducted in Switzerland, its
banks are forced to compete with international banks. Their
success is largely attributable to the soundness of the Swiss
franc,
Many Switzerland-based insurance companies operate in the
international insurance sphere, constituting another Import-
ant aspect of the Swiss financial community. Some reinsurers
obtain as much as 97% of their premium income from other
nations.
Work and residence permits are required for foreigners. A
temporary or permanent residence permit is required for for-
eigners who wish to establish a Swiss residence, with a work
permit bcing required for employment or activity in one's own
business. Residence permits are regulated by federallaw, but the
cantonal authorities are, in most cascs, authorised to issue res-
idence permits. Generally spcaking, temporary residence per-
mits are gran ted for aperiod of one year, and may be extended
upon application. A permanent residence permit, usually
granted only after continuous residence for ten years (the per-
manent permit may be granted after a shorter time, depending
upon the applicant's nationality), is granted for an unlimited
duration. Both permanent and temporary residence permits are
validonly in the canton where they are issued, unless a treaty
with the applicant's country specifies otherwise. Thus, if the for-
eigner wishes to move from one canton to another, he must
apply for and obtain a ncw residence permit. (Information
about Swiss residence permits is in fact only of academic interest
because Switzerland now rarely issues residence permits).
The Corporation
The Swiss legal entity known as the corporation is a company
with its own firm name. Its capital is divided into shares, and its
liabilities are exclusively covered by its assets.
The minimum allowable capitalisation of a Swiss corpora-
tion is 50,000 francs, at least 20,000 francs of which must be
paid in cash, or provided in subscription by non-cash capital at
the time of incorporation. In the case of fully paid-up capital
stock, the corporation can issue either registered or bearer
shares; if the capital stock is not paid up, the corporation can
issue only registered shares. The par value of a share must be at
least 100 francs. The "no par value" share is non-existent under
Swiss law.
Traditionally, Swiss companies have sought to generate a
large share of investment funds from international sources,
thus placing the operation on asound financial basis and
assuring continuity in times ofrecession.
At least three prospective shareholders are the legal require-
ment for forming a Swiss corporation. If one of the share-
holders wants to remain unidentified, he may, under certain
conditions, have a third party subscribe as his trustee.
Corporation by-Iaws must contain provisions relative to:
(1) The firm name.
(2) The location of the head office.
(3) The number and par value of the registered shares of
capital stock, and the bearer shares of capital stock.
(4) The time, place, etc. of the shareholders' meetings.
(5) The board of directors, auditor, and the forms of
notification.
The corporation is organised through a general meeting of
shareholders, the board of directors, and auditors.
The functions of the shareholders' meetings are: to approve
the profit and loss account; to approve the balance sheet and
the annual report; to adopt resolutions concerning the dis-
tribution of net profits, especia11yas it applies to the dec1aration
of dividends; to elect directors and auditors; to approve board
of directors' actions to amend the by-laws of the constitution;
and to determine liquidation procedures.
132 Tax Havens for International Business
The board of directors is made up of one member, or several
membcrs, a11 ofwhom must be shareholders.lfthere is only one
director, he or she must be a Swiss nationalliving in Switzerland.
If the board of dircctors consists of several persons, the majority
must be of Swiss nationality and live in Switzerland. The board's
activities are outlined in the by-laws of the corporation's con-
stitution, which must be written in accordance with Swiss law.
One or scveral auditors are elected at the shareholders'
meeting. Auditors are not required to bc shareholders. The
auditor(s) may be individuals or corporate entities, such as a
fiduciary company or an auditing association.
When a foreign corporation transfers to Switzerland, the
question of liquidation and re-establishment must be decided.
Generatly, the by-laws of a corporation set forth its domicile.
The by-laws must be written in accordance with the national
law that applies to corporations. Thus, if the laws of the
country where the corporation is originally formed are such
that transference to another country implies liquidation, then
liquidation, before subsequent re-establishment in the new
domicile, is mandatory. Likewise, if the laws of the country to
which the corporation is being transferred specificatly state the
necessity of reincorporation, liquidation and re-establishment
would be mandatory; however, the Federal Council of
Switzerland is authorised to grant permission to a corporation,
under such circumstances, to transfer to Switzerland without
prior liquidation, subject to the following provisions:
(1) The corporation must prove that, according to the laws
of the country where it was formed, it had a legal personality.
(2) The figures of the most current, approved balance sheet
must indicate that the capital stock is fully covered byassets.
(3) The transfer of the corporation's domicile must have
been validated through a resolution, in accordance with the
by-laws,
If the Swiss Federal Council refuscs permission to a forcign
corporation to rcdomicile in Switzerland without prior liquida-
tion, it must liquidate, and reincorporate in Switzerland to
acquirc legal status there. This re-establishment is called
"qualified incorporation", which rnust be accompanied by a
transfer of assets and liabilities to the corporation's Swiss
domicile. If the Federal Council permits such a transfer, entry
of the corporation in the Register of Commerce is required,
Switr.erland 133
and its by-laws must be adapted to Swiss law within six months.
In the case of one delay, the Federal Council may grant an
extension of time; if the second term elapses before the neces-
sary constitutional revisions are made, its entry in the Register
of Commerce is officially cancelled.
If a foreign corporation wishes to establish a branch office in
Switzerland, Swisslaw presupposes that a head office of the cor-
poration is domiciled elsewhere. A foreign corporation cannot
establish a Swissbranch in anticipation of isolating it from Swiss
commerce and Swiss law. This means that the branch must, if it
is to protect its business operations, adapt to Swiss rules and
regulations. The following principles must be adhered to:
(1) The admission, existence, and activities of a foreign
branch in Switzerland are regulated by Swiss law.
(2) Entry in the Register of Commerce by the Swiss branch
of a foreign corporation is required in exactly the same manner
as that of a Swissfirm.
(3) The Swiss branch of the foreign corporation is obliged
by Swiss law to keep books of account, and prepare financial
statements periodically.
(4) The branch office must be represented byan authorised
person of Swiss residence.
Rules for establishing a branch office in Switzerland must be
followed when the actual administration of a corporation is
transferred to Switzerland, and its centre of operation remains
in the foreign domicile. If, however, the centre of operation
also transfers to Switzerland, the rules for transferring a cor-
poration are effective.
In so far as Swiss law is concerned, the expenses incurred in
forming a corporation are the stamp duty levied on the newly
issued shares, the fees for entry in the Register of Cornmerce,
and the cost of the notarised certificate of incorporation. Add-
itional expenses might include fees for an attorney or other
qualified counsel to aid and advise you in establishing the cor-
poration, and the appointing of a director who must be paid
for his services. The cost depends, of course, upon the activity
and complexity of tbe enterprise. Special, more mundane
services, such as maintaining an office, bookkeeping, tax
accounting, and general correspondence also have to be paid
for. For on-the-spot advice and assistance in the forming of a
Swiss corporation, contact a Swisslawyer or a Swiss bank.
134 Tax Hauens JOT International Business
Taxation
Switzerland has a somewhat complex system of federal taxation.
Due to its federal structure, taxes are levied concurrently by
three different authorities: the federal government, the cantons,
and the municipalities. Generally speaking, the Swiss federal tax
laws are uniform throughout the country but the laws of the
cantons and municipalities may differ. Therefore, tax rules and
tax Jiabilitiesare likely to vary from one place to another.
In principle, Swiss companies are taxed at the three levels -
federal, cantonal, and municipal- on their profit and capital;
however, the rates as weil as the methods of taxation differ
according to the firm's legal structure. Although Swiss civil
law acknowlcdges only one form ofjoint stock company, there
are three different forms as regards fiscal treatment: the op-
erating company, the holding company, and thc domiciliary
company.
(a) An operating company is one that engages in an indus-
trial, manufacturing, or service activity. Such a company is
liable for a federal tax called a defence tax, on net earnings,
capital stock, and open and undisclosed reserves. Stamp duties
amount to 2% of the paid-in capital stock.
(b) Swiss law defines a holding company as one whose main
purposc is to participate in other companies through invest-
ments. The holding company is almost always legally struc-
tured as a corporation. The Swiss fedcral tax system, as weil as
those ofmost ofthe cantons, grants holding companies certain
tax privileges:
(1) The regular tax is reduced.
(2) The taxable capital is computed on a reduced basis.
(3) In lieu of options (1) and (2), a proportional tax on
capital, in combination with a tax exemption on earnings, is
appJicable.
However, for the Swiss holding company to gain tax privi-
leges offered holding companies by the fcderal tax system, a
corporation must meet the requirements outlined by federal
tax regulations. Otherwise, the federal tax system treats the
holding company the same as an operating company.
(c) The domiciliary company has its legal domicilc in
Switzerland, but has no office space. It does not engage in
business activities in Switzerland. Such a company is usually
limited by shares.
Switzerland 135
The domiciJiary company is often established in lieu of a
holding company, when the requirements for a holding com-
pany cannot be met. Domiciliary companies are often sales
agencies or patent and/or copyright marketing companies.
Any tax benefits to the domiciliary company come from the
canton. The federal tax system does not recognise it, but taxes
it as an operating company (if certain conditions are met, the
federal system may grant the domiciliary company similar
deductions to that ofthe holding company). As regards canton
taxation, the pure domiciliary company enjoys more extensive
tax advantages than the so-called mixed company; however,
variations on the domiciliary company do obtain some tax
advantages in the cantons. Shareholders' dividends paid by the
domiciliary company are subject to a withholding tax that is
currently 35%.
The Swisscommercial banks adhere closely to policies estab-
Iished by banks throughout the world . From the purely local
viewpoint, Swiss credit policies apply to virtually all types of
loans; however, credit extended to foreign customers is limited
to top-ranking companies, and to the financing of exports
from Switzerland. Loan terms vary with such factors as the
value of collateral, but are generally more favourable in
Switzerland than in many other countries.
To a large extent, the amount ofbank credit that a company
can get depends upon how much confidence the company can
generate in the banker's mind; therefore, each individual case
is subject to different treatment. To this end, a typical, business
oriented Swiss bank go es to considerable trouble to analyse its
c1ient's needs, and provide solutions that are fitting to the cap-
ital requirements of each case. To customers domiciled in
Switzerland, the following services are typically offered:
(1) Short-terrn credit of all kinds is extended, whether
secured or unsecured. This may be in current account form, or
as a fixed advance in either Swiss francs or foreign currency.
(2) Mortgage loans.
(3) Leasing and factoring.
(4) Refinancing of leasing operations.
(5) The discounting of acceptances, including the financ-
ing of medium-term receivables, that result from the export
business.
(6) The opening ofletters of credit.
136 Tax Havens JOT International Business
(7) Guarantees, sureties, and bonds for public authorities
and/or private persons.
To broaden their scope in the world money market further,
Swiss banks place the following facilities at the service of Swiss-
domiciled c1ients:
(I) Direct, short- to medium-term loans, wh ich may be in
Swiss francs or other convertible currencies, on a fixed interest
or a roll-over basis.
(2) Financing of Swiss merchandise (together with an
export risk guarantee by the Swiss government) .
(3) "ßridging" loans as a means of preliminary financing,
prior to capital market transactions in Switzerland and on the
Euromarket.
The banks of Switzerland not only assist corporations, but
business and private clients as weil, in specialised ways. Advice
or other services through some banks include:
(1) Transfer of payments in the national and international
sectors.
(2) ßuying and selling bank notes and paying instruments
in foreign currencies.
(3) Negotiation of stock market transactions internally and
abroad.
(4) Securities management and custody.
(5) Establishment of trusts, and counselling in investments.
Extremely sensitive to and knowledgeable about business
and commerce conditions in Switzerland, Swiss banks help to
establish contacts necessary to launch a Swiss enterprise. So me
publish brochures and booklets containing detailed informa-
tion on economic and business conditions. Such publications
also provide information on special features and on specific
regional industries. Some major banks have branches through-
out Switzerland, as weil as in London, Tokyo, New York,
Luxembourg, and Panama. The typical major Swiss bank has
representation in most major financial centres, and can be in
continuous communication with thousands of correspondent
banks world-wide
Switzerland has been a most successfully neutral country in
many European wars and both world wars, so in modern times
its cconomy has ncver been devastated by war-time destruction.
Also, it is a basically free enterprise country with little govern-
ment regulation and economic control and relatively low laxes.
Switr.erw.nd 137
The country is geographica11y in the centre of Europe,
where major continental roads from east, west, north and
south intersect. Its internal roads and railways are exce11ent,
and a11 Swiss transportation services are punctual. It is also
accessible by river barge directly from the sea, Airline service is
without peer, and telecommunications are the very best avail-
able. Needless to say, professional services are of the highest
quality and reliability.
Ag we have noted, Switzerland is politica11y stable, as is weil
attested to by its history, legal structure, and present soeioeco-
nomic situation. Its basic constitution, enacted in 1848 and
slightly revised in 1974, gives the country a confederation sys-
tem, It has 123 articles, speeifying rights and duties ofboth cit-
izens and the government. The 25 cantons have inalienable
constitutional rights that cannot be usurped by the federal gov-
ernmcnt. There is a seven-man national cabinet, nationally
elected. Foreign policy has for centuries heen peaeeful neutral-
ity concerning all international conflicts. The legal system is
grounded in the eivillaw tradition.
Switzerland is multilingual: German, French, Italian and
Romansh are official languagcs. German is the most wide-
spread tongue, having a variety of loeal dialects. English and
French are univcrsally taught in the high sehools, and the busi-
ness community is widely conversant with them.
All taxes on world-wide income add up to usually 25-35%.
Switzerland is clearly no tax haven.
The special treatment for holding eompanies applies to
merely "passive" sources (dividends, interest, ete.). Such tax
exemptions are highly limited, however; for instance, they do
not apply to interest from loans and royalties from leases paid
by companies in which one has stock ownership.
Even with a purely Investment-holding eompany, there is
one huge liability: a 35% withholding tax imposed on divi-
dends paid to foreign stockholders. It applies indiscriminately
to dividends, interest on bonds, and interest on bank deposits;
only royalties are exempted.
On the surface, the extensive Swiss network of double taxa-
tion treaties would seem to offer relief from this problem. The
treaties usua11y reduce the withholding taxes to 15% or 0%.
Howcver, the Swiss government has taken special mcasures to
restriet the usability of the agreements for tax minimisation
138 Tax Hauensfor International Business
purposes. If more than 50% of the profits of a Swiss company
derived from treaty country sources are paid to aliens, no with-
holding tax benefits can be c1aimed. One may think that the
way out is not to distribute dividends from the Swiss company
and instead reinvest all profits. However, another law requires
a company to pay as dividends at least 25% of the gross income
derived from tax-relief benefits. Thus, there are narrow limits
to using the treaties.
On top of these disadvantages, Swiss incorporation is
expensive.
Ir all this is not enough, neither the joint stock company nor
the private Iimited liability company offers any particular tax
advantages.
10 Liechtenstein - A Special
Case
139
140 Tax Havens JOT International Business
147
148 Index
common agrlcultural policy, co m- Denmark: lax treaties 52, 85
mon external tarlff (EC) 68 depreciation rates
common law 11,12 (Nelherlands) 92
company: status and advantages of 2, dlrectors 13, 15, 16: Bahamas 36;
8,11-17; structure and forms Gibtaltar 69:jersey 62,65:
of 13-16; Bahamas 3lHJ; Nelherlands 96:
Bcrmuda 38-9; Switzerland 129, 131, 132
Liechtenstein 139,141-5; disdosure see confidentiallty
Luxembourg 102-13; dividends: of Austrian
Nelherlands 78-80, 89, 90, subsidiaries 99-101; of
95-7: Switzerland 130-35. See Luxembourg companies 115;
also cOIporalc lax; Dclaware; withholding lax rate on 76--8,
holding companies: 89,90
incorporation Dominican Republic: lax holidays 20
confidentlality for dients 6; Cayman
Islands 13: Guernsey 66; employees, taxation of: Cyprus 52;
Hong Kong 73;jersey 162: jordan 121;
Liechtenstein 145; Malta 53, Netherlands 92-5
54: Isle of Man 58-60 English language, use of:
controlling companies Gibraltar 67: Greece 122:
(Luxembourg) 104 Hong Kong 71:
cooperatives 130, 142 jordan 119-20: Panama 46;
copyrights 21,29,58,74 Switzerland 137
corporate lax: Austria 99-101; Eurocurrencyloans
Greece 122; (Nelherlands) 77
Liechtenstein 141; European Community, status in and
Netherlands 78-90 with: Gibraltar 68:
corporation see company Guernsey 65:jersey 62;
cost-plus basis of taxing profit 87,88 Luxembourg 102: Malta 53:
credit institutions (Jordan) 120 Isle of Man 56, 60
creditors, of Luxembourg European Free Trade
companies 104 Association 128
currencies, trust funds for exchange controls: avoidance
holding 22 of 9-10; Bahamas 33-4:
customs duties: Greece 19; Hong Bermuda 37: Cayman
Kong 72;jersey 62: Islands 41: Hong Kong 71:
Malta 54; Panama 27, 50: jordan 121; Malta 54; Isle
Puerto Rica 125-6 of Man 59: Netherlands 80;
customs union between Liechten- Panama 46,47,50
stein and Switzerland 140 exempl status for companies 13,
Cyprus: shipping companles 19: as 14,26-7: Bermuda 38;
lax haven 28,51 -2 Caymans 41,42:
Czecho-Slovakia; lax treaties 52, 76 Gibraltar 68, 69;
Greece 122-3;jersey 63-5;
debenture loans 105 Jordan 121:
debt-to-equity ratio of subsidiary Liechtensteln 145: Isle of
78,90,101 Man 57-60:
dced, notarial 114 Netherlands 76;
Delaware corporation laws 12, 48 Philippincs 118-19
/1UÜX 149
expatriates, Dutch taxation of 93, 95 89-90: Switzerland 130, 137.
expert companies 22 See also finance holding com-
pany; intermediate holding
fake transactions 101 company; qualifying company
family business Hong Kong:manufacturing enterprise
(Liechtenstein) 139,144 in 8, 27: shipping companies
finance holding companies 104-6 in 19:company lawand capital-
finance companies: isation of companies 14,16: as
Netherlands 29, 74, 77-8: tax haven 27, 44-5, 70-73
Luxembourg 104 hotel building 9, 20
financial services (Isle ofMan) 57-61 Hungary: lax treaties 52, 76, 85
Finland: withholding tax 85
flags of convenience 19, 48, 54, 60 immigration laws:
foreign source income, countries Philippines, 118; Puerto
with no tax on 27-8, 44-73 Rico 126: Switzerland 127
foundations 141, 142, 143 import duties : Bermuda 38
France: tax treaties 52,85, 115 income tax: basis for 7-8: Cayman
free-tradc zone (Swiss) 128 Islands 14: Gibraltar 68:
French West Indies: tax holidays 20 Grecce 19,122;
Guernsey 66; Hong Kong 72;
gambling caslnos, tax on 34 Jersey 61,64. 65;Jordan 121;
genossenschaft 142 Liechtenstein 141: Malta 53,
Germany: tax treatics 52, 85 56: lsle of Man 57-9;
Gibraltar: exempt status for, Panama 47; Philippines 119:
corporations 13,27,28; as lax tax havens with none 26-8,
haven 67-70; use ofqualifying 31-43
company 79 incorporation, Jaws and process
Greece: complex lax laws 29: lax of: 2,10-17; Bahamas 35-6:
treaties 52, 85; regional Bermuda 38-9:
offices, legislation for 29, Caymans 41-3: Gibraltar 69:
121-23: shipping Guernsey 66; Hong
companies 19,29 Kong 72-3: Jersey 62-4;
group financing: Netherlands 90: NethcrJands 95-7:
Luxembourg 105,106 Panama 48-51:
guarantee, companies limited by 35 Switzerland 128-33, 138
Guernsey: relationship with EC 65: Indoncsia: withholding lax 85
no lax on foreign source industrial activity, of mixed holding
income 27,28: lax agreement company (Luxembourg) 102
withJersey 62 information, exchange of 9, 74
inheritance lax: Greece 122: laIe
Haiti : lax holidays 20 of Man 57: Panama 47
headquarters: location of 24-5: re- insurance companies: Malta 53;
incorporating in lax havcn 74 Isle of Man 58, 59:
holding companies: legislation 22: Switzerland 128
Austria 30,74,99-101: intangible assets, amortisation
Liechtenstein 141,144, 145: of 86-7
Luxembourg 30,74,102-16: interest: conversion to
Malta 28, 53, 54: dlvidends 100: withholding
Netherlands 29, 74, 77-9, tax on 76,78,89,104
150 Index
inter mediate holding companies Luxembourg: as tax haven 30, 74,
(Dutch) 89 85, 100, 102-16
'international intercompany tax
concession' (Austria) 99-100 Malta: screening offoreign corpora-
investment trusts and tions shipping companies 19,
companies 19-20:Jersey 64; 52; as tax haven 28, 52-6;
Luxembourg 30, 74, 102, withholding tax 85
104,106-11; Malta 53; Isle of Man, Isle of: exempt status for
Man 57-9; Switzerland 130 corporations 13,27,28;
Ireland: tax treaties 52, 76, 85 shipping companies 19; as
Israel: tax treaties 76, 85 tax haven 56-61
Italy: tax treaties 52, 76, 86 management holding company
(Luxembourg) 106-7,113
Jamaica: tax holidays 20 manufacturing companies, tax
Japan: withholding tax 85 havens for 18,27
Jersey, as tax haven 13,27,28,61-5 Morocco: tax holidays 20; wlth-
joint investment trust holding tax 85
(Luxembourg) 106--8 multinational corporations, use of
Jordan: tax benefits for regional tax havenry by 18,74. See also
offices 29,119-21 regional office
mutual funds In offshore tax
labour, skiIled, access to 18,27 havens 19; Luxembourg base
land: tax in Bahamas 34; restric- for 74
tlons in Bermuda 38; leasing
in Colon 50 Naamloze Vennootschap 80, 95, 96
Latin America, markets in 8 name of company 15, 16,36,62,
lawyer, use of in incorporation 17, 129, 131, 142
35, 72 Nauru 12
leasing companies 20 Netherlands: as tax haven 29, 74-99;
liablllties, of Luxembourg holding taxatlon treaties
company 104 Netherlands Antilles 75, 85
liability, Iimited 15 New Zealand: withholdlng tax 85
Liberia: corporation laws 12; nominees, use of in
shipping companies; no tax on incorporation 16, 35, 48, 53,
foreign source income 21,27, 62,66,69,72,73,114
28 non-resident companies 9-10,18,
Iicensing companies 58, 59, 90-91, 69
112 Norway: tax treaties 52, 85
Liechtenstein, as tax haven 139-45
Iimited liability companies: office, registered 16;
Netherlands 95-7; Austria 99; Bahamas 35;
Switzerland 130 Gibraltar 70; Guernsey 66;
liquidation, on transfer to Jersey 63: Luxembourg 114
Switzerland 132-4 offshore tax havens 18-25, 52, 54,
loans: by Luxembourg holding 56,57,101
companies 103, 105; by Swiss
banks 135-6 Pakistan: withholding tax 85
losses, in Dutch taxatlon 80-82, 86, Panama: corporatlon laws 12,
89,90 48-51; shipping companles 19;
Index 151
as tax haven 8,20,21,27, regional office of multinational
45-51 companies 29, 117-26
participating companies registration companies (Isle of
(Netherlands) 77,79-80 Man) 58
participating interests residence: as basis for income
(Luxembourg) 102, 103 tax 7,9-10, 18,68; rules for
participation exemptlon 80-82, (Guernsey 66;jersey 63;
89,90 Liechtenstein 141-3;
partnershlp: Netherlands 95, 97; Luxembourg 114; Isle of
Luxembourg 103; Man 57,60;
Swilzerland 129-30 Netherlands 80, 92-5;
patents 21,29,58,59,74, 102, Switzerland 127, 128)
111-13 reinvestment see Investment trusts
pension funds (Malta) 53 repurchase company 113
Philippines: legislation for regional returns, annual, legal requirement
offices 29,117-19 for 16, 36, 42, 49, 50, 62, 63,
Poland: withholding tax 85 66,70
political stability 9, 27, 29, 32, 40, Romania: tax treaties 52, 85
41,67,71,139 royalties: tax haven advantages
porlfolio Investment 90 for 21,29; companies for (Isle
premiums of Luxembourg of Man 58, 59;
investment companies 111 Netherlands 74); withhold-
professional services: Bahamas 34; ing lax on 89-91
Bermuda 37,38; Russia:withholding tax 85
Caymans 41;HongKong 71,
72; Luxembourg 115; securities of holding company
Malta 55; Panama 46,51 ; (Luxembourg) 102, 111-13,
Switzerland 135-7. See also 116
banks service companies: tax haven advan-
profit, taxation of: Austrla 101; tages for 21,23; Netherlands
Netherlands 81,82,87 corporate taxation of 87
property investment (Isle ofMan) shares and shareholders: in public
58 and private companies 13-16;
property, management of Bahamas 35-6; Bermuda 38;
(Malta) 54 Cayman Islands 41-3;
property tax: Bermuda 38; Gibraltar 69; Greece 124;
Netherlands 91 Guernsey 66; Hong
public and private corporations 13, Kong 72-3;jersey 62;
14 Liechtenstein 139, 143;
public IImitedjoint stock company Luxembourg 103-5, 107-11,
(Luxembourg) 113-14 114; Malta 54; Isle of
publication of company details Man 58,61;
(Luxembourg) 115,116 Netherlands 78, 79, 82, 83,
Puerto Rico 5,12,20,124-6 95-7; Panama 48, 49;
Switzerland 131, 132
'qualifying company' 28, 69, 79 'shelf companies' 58, 66
shipping companies: tax havens
regional headquarters, Netherlands for 19,28,52-4; in Isle of
corporate taxation of 87-9 Man 58-tiO; in Greece 122-4
152 Index
shipping facilities: of Cyprus 52; of Unilateral Decree
Panama 8,48,51 (Netherlands) 80, 82
Singaporc: withholding tax 85 United Kingdom: attitude to tax
social security taxes, exemption from havenry 5: corporation
Uordan) 121 law 13; control of offshore
South Africa: withholding tax 85 activities 18: tax agreements
South Korea: withholding tax 85 and treaties 52, 59, 62. 76, 86,
Spain: tax treaties 76, 77,85 115
Sri Lanka : withholding tax 85 United States: attitude to tax
stock exchange transactions, fee- havenry 5, 6; basis of income
free (Netherlands) 80 tax 7, 8; control of offshore
subsidiary: compared with actlvitles 18; tax treaties 52,
branch 83-4, 86; 54,76,77,86,115
Austrian 99-101
Surinam: tax treaties 76, 85 value added tax: Gibraltar 68;
Sweden: tax treaties 52, 86 Guernsey 65; Isle ofMan 57,
Switzerland: capitalisation of 59; Netherlands 97-9
companies 14; wilhholding Vanualu: screening of foreign
tax 86; as tax haven 127-38; corporations 10
taxation system 134-5 vehicle reg lstration fees, Greek
Syntex Corporation 21 legislation on 19
Vennolschap Onder Firma 97
tax avoidance, legalilyand rnorality verein 142
of 3,4
tax haven, definition of 1 warehousing: facilities in
tax holidays 20,23,57,58,82 Colon 50; use of branches for
tax treaties and agreements 2. 9. 11. (Netherlands) 89; in Puerto
85-6; Auslria 30.74.91-101. Rico 125
115.141; Cyprus 28; withholdlng lax: on US bank
Liechtenstein 141; interest 5; for non-
Luxembourg 115; Malta 53. residents 7; Latin
54; Netherlands 74, 76, 78. 80, America 44, 47;
82, 88-90; Switzerland 137-8 Luxembourg 104: Malta 54;
Thailand: tax treaties 76, 86 Isle ofMan 59; Panama 47,
trade marks 29,58,59, 74 49; and double taxation
trading and non-trading companies: agreements 74, 76-8, 84-6,
Malta 28, 53-4; Isle of 89,90.100. 101;
Man 58.60 Switzerland 127, 137, 138
travel business 20. 21 work permlts: Bahamas 33, 34;
trust funds and organisations 22, Jordan 121;
141,143,144 Liechtenstein 143;
lrustee bank 106, 108. 113 Greece 124; Switzerland 128
Tunisia: legislation for regional
offices 29, 124; lax yachts, registration of 52
holidays 20
Turkey: wlthholding tax 86 Zambia: withholding tax 86